Brexit's Retreat Sends Aussie Toward Pre-Rate Cut High

  • Aussie may rise up to 2% if U.K. votes to stay in EU, CBA says
  • Traders have reduced net short positions on Aussie currency

Brexit Portfolio: Preparing for the Vote

The Aussie dollar is climbing back toward levels seen the day of the local central bank’s last interest-rate cut, as polls signal the U.K. is likely to stay in the European Union. Australia’s biggest commercial bank says a vote to remain could spark a rally of as much as 2 percent.

The Federal Reserve’s reluctance to tighten monetary policy is helping preserve the yield premium for Australian government debt over Treasuries and polls showing the “Remain” campaign gathering momentum before the U.K.’s referendum on Thursday pushed the Aussie back up to 74.85 U.S. cents as of 12 p.m. Tuesday in Sydney. That’s within 3 cents of the level it reached just before the RBA eased policy on May 3. Hedge funds scaled back bets against the Aussie last week for the first time since April.

“If there is a vote to remain and global equity and commodity markets lift, the Australian dollar could rally 1 percent to 2 percent,” said Joseph Capurso, a senior currency strategist in Sydney at Commonwealth Bank of Australia.

The Aussie is gaining as part of a global rally in higher-yielding currencies, as the first poll taken after the murder of pro-EU lawmaker Jo Cox showed the campaign for the U.K to remain in the trading bloc was gaining momentum. Swaps traders were pricing in a 39 percent chance that the Reserve Bank of Australia will cut rates by August, compared with a 50 percent probability at the end of May. The central bank, in minutes of its most recent policy meeting released Tuesday, noted the stronger-than-anticipated pace of economic growth, although inflation was expected “to remain low for some time.”

For a story on RBA monetary policy and global risks, click here.

As the odds of a British exit, or Brexit, ease, investors are unwinding a shift into haven assets and currencies that spurred a global bond rally and pushed the yen to its strongest level against the greenback in almost two years. As part of that reversal, investors are ramping up their bets on equities and have once again started to buy British pounds and higher-yielding currencies such as the Aussie dollar.

A poll from Survation taken June 17-18 for the Mail on Sunday newspaper showed “Remain” backed by 45 percent and “Leave” by 42 percent, reversing positions from Survation’s previous survey. The probability of a vote to leave the European bloc has declined to about 30 percent from almost 40 percent on Wednesday, according to bookmaker odds processed by the Oddschecker website.

Net Shorts

Traders cut their bets on the Aussie declining against the greenback in the week to June 14, the first bullish shift in seven weeks, figures from the Washington-based Commodity Futures Trading Commission showed. The difference in the number of wagers by hedge funds and other large speculators on a fall in the Australian dollar compared with those on an advance -- so-called net shorts -- was 6,778 last Tuesday compared with net shorts of 15,808 a week earlier, according to the data.

The Aussie has strengthened 3.5 percent this month, partly reversing a 4.9 percent loss in May that was the biggest monthly drop in 10 months. That decline was fueled by the RBA’s decision to cut its cash rate to a record low 1.75 percent on the back of weaker-than-anticipated inflation.

“The Australian dollar will likely rally if Britain votes to stay,” said Daniel Been, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “But beyond the initial reaction, I think it is an opportunity to sell the rally as the RBA’s easing bias remains and the Fed looks under-priced for hikes.”

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