This article appeared in Yield matters on 23 Feb 2016
Hedge funds and other large speculators turned bullish on the Australian dollar last week for the first time since May 2015, while Macquarie Bank Ltd. said selling South Korea’s won is now the favored way to bet against China.
Although Asia’s largest economy is the primary destination for both Australian and South Korean exports, the Aussie’s less than 2 percent drop this year pales in comparison to a 5 percent slump in the won that’s come as China’s benchmark equity index has plunged. Expectations of relative price swings for the Australian dollar are the lowest since January 2015 when compared with a JPMorgan Chase & Co. index for the overall currency market.
The Aussie dollar has climbed about 5 percent from a near seven-year low reached in January amid signs Australia’s labor market is recovering enough to allow the Reserve Bank to extend a nine-month stretch in which interest rates have remained unchanged. In contrast, wagers against South Korea’s won have been rewarded amid mounting speculation its central bank will ease policy as exports tumble, with the prospect of even further weakness if China resumes devaluation of the yuan, also known as the renminbi.
“The international macro-fund community is no longer universally bearish on Aussie and some are even considering taking out outright long Aussie positions,” said Gareth Berry, a foreign-exchange and rates strategist in Singapore at Macquarie. “There are several things happening in Korea now that make it a target for people who wish to express a negative view on the renminbi.”
In the week to Feb. 16, traders had 2,807 contracts more betting on Aussie dollar gains than declines, data from the Commodity Futures Trading Commission show. That’s the first net long position since May and compares with a record short position of 76,851 in March 2015.
The Australian dollar bought 71.74 U.S. cents as of 5 p.m. on Monday in Sydney, after completing back-to-back weekly gains to close at 71.48 on Feb. 19. It has rallied this month after touching a low of 68.27 on Jan. 15, its weakest level since March 2009.
In contrast, South Korea’s won has been February’s worst-performing major currency amid rising geopolitical risk from North Korea and speculation the central bank will cut interest rates. Bank of Korea Governor Lee Ju Yeol saidlast week that economic uncertainties are “higher than ever.”
The won traded at 1,234.01 per dollar, close to the 5 1/2-year low of 1,239.59 it reached on Feb. 19. The currency will weaken about 5 percent to 1,295 by year-end, JPMorgan said in a report last week in which it revised its forecasts down.
The correlation between the won and yuan are higher than for other emerging-market currencies in Asia and the markets “clearly” see the Korean currency as a good proxy for the short China trade, wrote Jonathan Cavenagh, head of Asia emerging-market currency strategy at JPMorgan Chase in Singapore.
China’s August devaluation of the yuan roiled markets, and some forecasters are betting that there is more pain to come despite a 1 percent rally this month. Recent stability in the Aussie has turned investor attention to other currencies including the won, which is moving and also cheaper to hold a short position in, Macquarie’s Berry said. Declines in the Australian dollar may resume should China weaken its currency again, he said.
The Australian dollar is gaining some support from the Reserve Bank of Australia’s apparent reluctance to lower its benchmark rate from an already record low 2 percent, even as the swaps market is already pricing in a quarter percentage point cut over the next six months.
The Aussie is also benefiting from improved risk appetite and it may advance further this week if a meeting of Group of 20 central bankers and finance ministers signals a coordinated effort to boost global growth, according to Citigroup Inc.
Over the medium-term, the Aussie will continue to be vulnerable to the slowdown in Asia and be used as a liquid proxy for China by fund managers unable to trade emerging-market currencies, said Todd Elmer, a Singapore-based foreign-exchange strategist at Citigroup.
“While I certainly think there is scope for trade in other Asian currencies to deepen, I don’t think that Aussie’s position as one of the preeminent China proxies is going to change any time soon,” he said. “On the margin things are certainly moving in that direction, but this sort of shift is tectonic, it’s not going to happen overnight.”
Source: Candice Zachariahs, Bloomberg