Australian Dollar: Asset Managers Betting on a Decline

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Data from the CME Group shows asset managers have ramped up bets against the Australian Dollar as they anticipate an interest rate cut from the Reserve Bank of Australia in 2024.

According to CME - the U.S. exchange - recent data on positioning reveals asset managers increased their bearish bets on the Aussie dollar to take the net short position to over 91K, an increase 42K contracts on the previous week.

Analysis of the figures by independent research house Macro Hive finds asset managers have become increasingly bullish on the U.S. dollar more broadly, as positioning among most major currencies waned over the last month.

The data comes as the Australian dollar trades around its year-to-date lows of 0.6450 against the Dollar, but as it recovers some ground against the Euro and British Pound.

CME data also reveal that hedge funds have become more bullish on the Aussie currency and are now running a net-long as China announces more support for its troubled property sector.

"In stark contrast, asset managers continue to increase their bearish bets and are now at their most bearish on record," says Macro Hive in a recent analysis of the positioning data.

CME Group's data on option strikes meanwhile suggests to Macro Hive there is continued bearish demand on the Aussie dollar around $0.645, with bearish bets particularly increasing below 0.633.

Above: Asset managers maintain bearish AUD positioning - Macro Hive.

The Australian Dollar's prospects going forward will largely depend on the effectiveness of China's efforts to stabilise its property sector and thus boost demand for iron ore, a key Australian export.

"Further stimulus from China seems to have driven hedge fund positioning to become more optimistic on the Aussie dollar. Hedge funds have increased their net longs on the Aussie dollar by 9,500 contracts since last month," says Macro Hive.

The RBA's decision-making will also prove instrumental as markets are now pricing in a greater likelihood of the RBA cutting its base rate next year.

"We find that since July, when the market was pricing in just a 33% chance of a rate cut by yearend 2024, the probably has risen to above 85% today. RBA governor Lowe has also increasingly highlighted the weaker Australian economy," says Macro Hive.

Above: Leveraged funds flip long AUD - Macro Hive.

Foreign exchange markets remain highly responsive to relative interest rate trajectory, favouring those currencies belonging to central banks that are inclined to out hike peers and delay interest rate cuts.

A currency will tend to weaken if its central bank is expected to be amongst the first to cut rates.

"We agree with asset manager positioning and maintain our bearish position over the next six months on the Aussie dollar. Despite the RBA going on hold, we think there could be one final hike later this year if Q3 wage data exceeds expectations. After that, we think pressure to cut rates will increase next year as the Australian economy continues to weaken," says Macro Hive.

The Australian Dollar-U.S. Dollar is at 0.6414 at the time of writing, the Pound to Australian Dollar at 1.9448 and Euro-Aussie at 1.6744.