RBA Roils Hedge Funds From Aussie Bulls to Bank Stock Bears

  • Futures traders see more than even chance for a cut by August
  • RBA outcome blew some strategies out of water, Pengana says

Is Surprise RBA Rate Cut Just a First Act on Inflation?

Hedge funds may be feeling deflated after getting it wrong on the Australian dollar and the nation’s bank shares.

The Reserve Bank of Australia’s decision to cut interest rates to a record Tuesday -- when a majority of economists surveyed saw no change -- sent the Aussie tumbling and fueled a rally in Sydney-listed bank shares, just as hedge funds were wagering for further gains in the currency and declines in those stocks. Futures markets showed a better-than-even chance for another easing by August.

“Those trades are not working too well for hedge funds,” said Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd., which oversaw about $116 billion as of end-December. “The door is voluntarily open for more rate cuts.”

The RBA needs a weaker currency to spur a revival in industries outside mining, where an investment boom is halfway through unwinding.

Central bank Governor Glenn Stevens and his board lowered the cash rate by 25 basis points to 1.75 percent Tuesday, a move predicted by just 12 of 27 economists surveyed by Bloomberg. The rest had seen no change. Data last week showed quarterly deflation in the consumer price index and the weakest annual pace on record for core inflation -- which the RBA aims to keep between 2 percent and 3 percent on average.

Aussie Plunges

The Aussie plunged 2.4 percent to 74.85 U.S. cents Tuesday, the biggest drop since November 2011. It traded at 75.02 at 10:56 a.m. Wednesday in Sydney.

Shares of Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp. and Australia & New Zealand Banking Group Ltd., the country’s four biggest lenders, surged more than 2.3 percent Tuesday, after slumping at least 8 percent this year through Monday.

The S&P/ASX 200 Index dropped 1.1 percent Wednesday.  Commonwealth Bank lost 0.8 percent and ANZ lost 0.7 percent, while Westpac declined 1.3 percent and National Australia Bank sank 2.2 percent.

Levels of short interest in the so-called Big Four lenders climbed more than 40 percent since the start of the year through last week amid concern regulation will constrain growth at the companies that make up about one third of the Australian equity market.

AMP Capital’s Oliver said he has been betting for the Australian currency’s decline since last year as he predicts another rate cut in August amid efforts by the RBA to counter a wave of disinflation that’s swept over the developed world. The currency is set to drop toward 60 cents in 2017, he said. That’s more bearish than analysts’ median estimate of 73 cents in the first quarter of next year.

August Probability

Interbank cash rates futures for August were yielding 1.61 percent Wednesday, indicating about a 50 percent chance that the central bank will cut rates by that month.

Citigroup Inc. disagrees, saying in a report Tuesday that the rate cut doesn’t herald the end for Aussie bulls.

“While today’s cut represents a set back for Aussie bulls, we doubt this starts the beginning of an extended downturn,” Josh O’Byrne, a strategist at Citigroup, wrote in the note. “Position metrics suggest investors are far from overweight Aussie, and in fact continued positive regional momentum could encourage proxy buying.”

Tuesday’s reversals haven’t turned shorting banks and going long the Aussie into loss-making trades for the year.

Still in the Black

Commonwealth Bank is down 13 percent since the end of 2015 and ANZ has lost 11 percent. Australia’s currency had climbed as much as 15 percent after dropping in January to a more than six-year low. It is up 2.9 percent since Dec. 31. Hedge funds betting on the currency’s gains have outnumbered those expecting declines since the middle of February.

“A few of the currency boys will be a bit sore and sorry for themselves I suspect,” Tim Schroeders, a Melbourne-based equity fund manager at Pengana Capital Ltd., said by phone. “It’s blown a few people’s strategies out of the water.”

Before it's here, it's on the Bloomberg Terminal.