Aussie Options Reveal Limit to Rally That Stevens AbhorsJohn Detrixhe
The end of the Australian dollar’s longest rally in four years is starting to be seen in the options market.
Derivatives that give the buyer the option to sell the Aussie against the U.S. dollar, or puts, have made up a majority of trades for the past five weeks, reaching 66 percent after being as low as 42 percent the second week in April, according to Depositary Trust & Clearing Corp. data compiled by Bloomberg. The currency is up 8 percent from this year’s low reached Jan. 24, on pace for its fourth-straight monthly gain.
The Reserve Bank of Australia would welcome relief from a rising currency, which officials last month described as high by historical standards and a risk to exporters amid a slowdown in China, the nation’s largest trading partner. The Aussie’s gains have been driven by reserve managers snapping up government debt with the highest yields among AAA rated peers.
“The professional or hedge-fund universe still has a negative bias on the Australian dollar as a result of being closely linked to China,” Neil Azous, the founder of Stamford, Connecticut-based research firm Rareview Macro LLC, said May 15 in a phone interview. That analysis “of the options market suggests there’s a downside bias to Aussie dollar.”
Strategists have been busy trying to keep up with the Aussie’s gains, raising the median year-end forecast in a Bloomberg survey to 89 U.S. cents, from 85 in February. Futures traders are the most bullish in a year.
Australia’s dollar has gained 4.9 percent versus its U.S. counterpart this year, the third-biggest increase among 16 major currencies tracked by Bloomberg, to 93.27 U.S. cents as of 2:58 p.m. in New York.
“Reserve managers continually buy Aussie dollar because it has the highest yield for a AAA nation,” Azous said.
The nation’s two-year government bond yielded 2.67 percent, the highest after lower-rated Iceland’s 4.58 percent among 21 developed sovereign markets tracked by Bloomberg.
Among countries with the highest ratings, similar-maturity debt yielded 1.04 percent in Canada, 0.09 percent in Germany and negative 0.04 percent for Switzerland. Notes sold by the U.S., whose credit was downgraded from AAA by Standard & Poor’s in 2011, yielded 0.35 percent.
Hedge funds and other large speculators were the most bullish on Australia’s currency versus the U.S. dollar in a year as of May 13, figures from the Washington-based Commodity Futures Trading Commission show.
The difference in the number of wagers by hedge funds and other large speculators on an advance in the Australian dollar compared with those on a drop, net longs, totaled 17,127 contracts.
The Aussie is about even with its 93.62 level on April 15, when RBA Governor Glenn Stevens and his board said in the minutes of that month’s policy meeting that achieving “balanced growth” would be more difficult “given the rise in the exchange rate over the past few months.”
As predicted by all 33 economists surveyed by Bloomberg News, the central bank refrained from raising the overnight cash-rate target from a record-low 2.5 percent, even amid signs of a real-estate bubble. Policy makers reiterated that the most prudent course is likely to be a period of steady rates.
Property market prices have increased for six straight quarters amid low borrowing costs. The median house and apartment price in Australia’s eight biggest cities rose 10.9 percent in the first quarter from a year earlier, with Sydney’s 15.7 percent increase leading the gains, according to the Australian Bureau of Statistics.
At the same time, there are signs that China’s growth is faltering.
Manufacturing in the world’s second-biggest economy contracted for a fourth month in April, according to a private survey. Gross domestic product is forecast to expand 7.3 percent this year, compared with 10.4 percent in 2010, according to Bloomberg surveys.
In the options market, Australian dollar put trades have exceeded calls since the week ended April 19, topping out at 66 percent two weeks later, DTCC data compiled by Bloomberg show. The trades made up 62 percent of a notional A$10.1 billion in deals last week.
Traders may be betting that the central bank won’t tolerate much more Aussie strength, believing that gains to 95 U.S. cents may spur policy makers to take action to weaken the currency, according to Bank of America Corp.’s John Hopkinson.
“It’s well established that the RBA in the past has talked about the currency at these levels being overvalued by a decent amount,” Hopkinson, head of quantitative foreign-exchange research at Bank of America in New York, said May 15 by phone. “It’s natural from a value perspective that you’d want to buy puts.”