Hedge Fund 75-Cent Aussie Call Draws Investors: Australia Credit

Photographer: Carla Gottgens/Bloomberg

The Aussie, the world’s fifth-most traded currency, was at 90.41 U.S. cents as of 5 p.m. in Sydney yesterday, after reaching an almost three-year low of 88.48 cents on Aug. 5. Its 13 percent loss this year is the steepest slide among the Group of 10 major currencies. Close

The Aussie, the world’s fifth-most traded currency, was at 90.41 U.S. cents as of 5... Read More

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Photographer: Carla Gottgens/Bloomberg

The Aussie, the world’s fifth-most traded currency, was at 90.41 U.S. cents as of 5 p.m. in Sydney yesterday, after reaching an almost three-year low of 88.48 cents on Aug. 5. Its 13 percent loss this year is the steepest slide among the Group of 10 major currencies.

European investors are backing Excalibur Funds Management Pty’s call for the Australian dollar to slump to 75 U.S. cents, reflecting record bets from speculators on declines in the currency.

Institutional investors placed $200 million with the Sydney-based hedge fund’s Australian dollar-only strategy since it started July 17, Matthew Harper, a principal and trader at Excalibur, said in an interview Aug. 22. Hedge funds and other speculators swung from record bets on Aussie gains in December to the most wagers ever this month that the currency will fall.

The local dollar slid 15 percent from a peak in April as China’s slowdown sapped demand for the nation’s commodities and the Reserve Bank cut benchmark rates to a record, eroding the currency’s high-yield status. Harper forecast the spread between Australian and U.S. 10-year government yields, now more than 1 percentage point, will converge by mid-2014.

“There are a lot of headwinds ahead for the Australian dollar,” Harper said. “We can’t rely on China, which we have for the last four or five years.”

The Aussie, the world’s fifth-most traded currency, was at 89.81 U.S. cents as of 1 p.m. in Sydney, after reaching an almost three-year low of 88.48 cents on Aug. 5. Its 14 percent loss this year is the steepest slide among the Group of 10 major currencies.

Record Shorts

The difference in the number of wagers by large speculators on a drop compared with those on a gain -- so-called net shorts -- increased by 462 to 63,183 in the week to Aug. 20, figures from the Washington-based Commodity Futures Trading Commission show. That compares with an all-time high of 76,779 on Aug. 6.

Australia, the world’s biggest shipper of iron ore, cut its forecast in June for exports of minerals and energy. The Bureau of Resources and Energy Economics said then that shipments were set to total A$177 billion ($159 billion) in the year ended June 30, less than the A$186 billion previously estimated and the first annual decline since the year ended June 30, 2010.

“China’s growth is going to be 5 percent in a couple of years time,” Harper said. “We are in a downward spiral.”

China Slowing

The world’s second-largest economy slowed to a 7.5 percent expansion pace in the second quarter, extending China’s longest streak of expansion below 8 percent in at least two decades.

The RBA will drop rates further to stimulate Australia’s economy unless the currency declines on its own, UBS AG said in a research note e-mailed yesterday.

“A weaker currency is a necessary condition for full economic rebalancing in Australia,” wrote Gareth Berry, a Singapore-based foreign-exchange strategist for UBS. “It will likely happen one way or the other -– ideally without another rate cut, but if a cut is needed the RBA will not be found wanting.”

The RBA said the currency’s direction would be important in setting policy, in minutes published Aug. 20 from the Aug. 6 meeting when it cut benchmark borrowing costs to a record 2.5 percent.

Traders see a 62 percent chance policy makers will cut the overnight cash-rate target to 2.25 percent or lower by year-end, according to data compiled by Bloomberg from swaps.

U.S. Spread

Australia’s 10-year government yield declined six basis points to 3.96 percent, while the 10-year U.S. Treasury yield was 2.80 percent. The margin between the two was 116 basis points after reaching 96 basis points on Aug. 1, its smallest since 2007.

The shrinking margin will discourage investment in the Aussie, Harper said. He expects the Treasury yield to converge with similar-dated Australian notes at around 3 percent in mid-2014.

“In 2005, it was the closest convergence of those two rates and the Aussie was 75 cents,” he said. “Traditionally the Aussie has been in demand for its yield and when the carry or interest-rate differential is no longer positive, global demand for the currency falls dramatically.”

Harper, a former National Westminster Bank Plc trader in Sydney, runs the fund with James Wallace, an ex-Citigroup Inc. (C) trader. The two each have more than 25 years of forex trading experience and have been with Excalibur since its start in 2006.

Loss Limits

Excalibur, which also runs a G-10 currency strategy, targets an annual return of 10 percent to 13 percent and has a defined system of risk management that limits its maximum loss to 2.5 percent in any one month. Its annualized compound return stands at 10.02 percent since inception with a maximum monthly loss of 2.1 percent, according to an Excalibur presentation.

“There aren’t that many currency strategies around and a strategy focused on the Australian dollar is fairly uncommon,” said Chris Gosselin, chief executive officer of Australian Fund Monitors Pty, which tracks hedge funds in the country.

The median estimate of 50 analysts compiled by Bloomberg is for the Aussie to drop to 89 cents by Dec. 31. The premium for one-month options granting the right to sell the Aussie versus the dollar relative to those allowing for purchases was at 1.95 percentage points yesterday, according to data compiled by Bloomberg on 25-delta risk reversals.

Australia faces a 35 percent chance of falling into recession within a year, according to Macquarie Group Ltd., the nation’s biggest investment bank, the most bearish of 13 economists surveyed this month by Bloomberg News. Saul Eslake, chief Australia economist for Bank of America Merrill Lynch in Melbourne, projects a 20 percent chance.

Excalibur’s forecast of 75 U.S. cents is based on the RBA lowering its benchmark to 2 percent, Harper said. The currency would fall more in a recession, defined locally as two consecutive quarters of contraction. Harper sees as a 30 percent chance of that by 2015.

“If that is the case, we can see Aussie testing the lows of 60 cents that we saw in 2008,” Harper said.

To contact the reporters on this story: Narayanan Somasundaram in Sydney at nsomasundara@bloomberg.net; Iain McDonald in Sydney at imcdonald7@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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