Australia’s dollar advanced for a second day against the greenback amid speculation bets against the currency were excessive.
The Aussie erased a 0.6 percent loss as rallying Asian stocks revived demand for higher-yielding assets after reports on Chinese inflation and Australian business conditions had pushed the currency lower. The local dollar touched a three-year low last week as trades against it reached a record. New Zealand’s kiwi gained after the nation’s business confidence rose to the highest in almost four years.
“The Aussie is such an obvious trade that the market gets skewed the same way,” said Greg Matwejev, the director of FX hedge fund sales at Newedge Group SA in Hong Kong. “Any short squeeze at the moment has scope potentially to go up towards 92 and a half-plus U.S. cents.” A short position is a bet that a currency will decline.
The Australian dollar gained 0.5 percent to 91.77 U.S. cents as of 5:43 p.m. in Sydney from yesterday, when it climbed 0.7 percent, the most since July 1. It touched 90.37 on July 3, the lowest since September 2010. New Zealand’s currency jumped 0.8 percent to 78.60 U.S. cents.
The MSCI Asia-Pacific Index of stocks rallied 1.6 percent.
The Australian dollar has tumbled 9.4 percent in the past three months, the worst performer among 10 developed nation currencies tracked by Bloomberg Correlation-Weighted Indexes.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the Australian dollar compared with those on a gain -- so-called net shorts -- was a record 70,515 on July 2, figures from the Washington-based Commodity Futures Trading Commission show.
Australia’s dollar earlier slid to as low as 90.83 U.S. cents after a gauge of business conditions slumped to the least since May 2009. The National Australia Bank Ltd. survey sank to minus 8 in June from minus 4 the month before.
The currency had also been pushed lower after a government report showed China’s consumer price index rose 2.7 percent in June from a year earlier. The median estimate in a Bloomberg News survey of economists was for a 2.5 percent increase. China is Australia’s largest trading partner.
“The higher China inflation suggests less likelihood the People’s Bank of China will provide monetary policy support,” said Joseph Capurso, a Sydney-based currency strategist at Commonwealth Bank of Australia. “The market has marked down demand for Australian exports to China, and pushed down the Aussie.”
Swaps data compiled by Bloomberg show traders see a 54 percent chance the Reserve Bank of Australia will cut its benchmark rate to an unprecedented 2.5 percent at its next meeting on Aug. 6. The probability was 45 percent yesterday. The key rate already stands at a record low of 2.75 percent.
Australia’s inflation-linked bonds indicate scope for more easing after having underperformed the broader sovereign-debt market for four months, the longest run in 16 years.
Bonds that protect against rising costs fell 4.5 percent from March through June, while securities without adjustable payouts were little changed, according to Bank of America Merrill Lynch indexes. The last time so-called linkers trailed for so long was in 1997.
“The forces are in place for Aussie to trend lower,” said Kieran Davies, chief economist at Barclays Plc in Sydney. For the Australian economy, “it’s hard to see any upside in the next six months to a year,” he said.
In New Zealand, business confidence rose in the second quarter to the highest since the period ended September 2009. The New Zealand Institute of Economic Research’s poll climbed to 32 from 23 in the first three months of the year.
Finance Minister Bill English told parliament today that the budget deficit may be NZ$5.5 billion ($4.3 billion) in the year ending last month, NZ$2 billion narrower than forecast in the 2012 budget.