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Funds Clash Over Which Way the Australian Dollar Is Headed

Updated on
  • AMP Capital expects Australian dollar to slide this year
  • Leveraged funds ramped up bets this year for stronger Aussie

One of Australia’s biggest money managers is wagering the nation’s currency will slide, just as hedge funds ratchet up bets on the Aussie appreciating.

The Australian dollar will drop to 73 U.S. cents before the end of the year, according to Ilan Dekell, head of macro for global fixed income at AMP Capital Investors Ltd. That’s at odds with leveraged accounts -- often hedge funds -- that this year have increased positions that pay off if the Aussie strengthens.

Dekell says you need to be short Australia’s currency for these reasons:

  • Rate differentials -- as the Reserve Bank of Australia holds interest rates at a record low level through the remainder of this year, the U.S. Federal Reserve will hike rates at least three more times
  • Australia’s terms of trade is declining  
  • Market volatility is at elevated levels, piling more pressure on the Aussie, which typically performs poorly during risk-off periods

“If I look at the positives for the Aussie dollar, they’re just not there any more," Sydney-based Dekell, who oversees about A$52 billion ($41 billion) of AMP Capital’s A$179 billion in funds management assets, said in an interview on Wednesday. “We expect Australia to be an under-performer.”

AMP’s stance chimes with Aussie bears from Aberdeen Standard Investments to Schroder Investment Management Australia Ltd. who say with inflation struggling to get back to the central bank’s target, policy will remain loose. That comes as the Federal Reserve this week delivered a more hawkish posture.

Hedge funds and other large speculators have turned increasingly bullish on the Aussie this year, shifting from a net short position at the start to a net long of 29,553 contracts in the week ended Feb. 13, according to data from the Commodity Futures Trading Commission. To-be-sure, that’s still down from 86,204 contracts at the end of August.

China may be the deciding factor for where the Aussie lands. If the world’s second-biggest economy slows, as many expect, that may weaken demand or resources Australia sends to its largest trading partner. Still, with the International Monetary Fund predicting a global economic expansion of 3.9 percent this year and next, which would be the fastest since 2011, that may provide support for Australia’s currency.

Read more on why Chinese growth might be the key to the Aussie’s outlook

The Aussie bought 78.24 U.S. cents as of 4:38 p.m. in Sydney on Friday, down almost 3 percent this month and off the highs seen late January. It ranks as the second-worst performing major currency against the greenback this year.

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