From the SMH blog:
Investors are scampering to unwind wagers on a decline in Australia’s dollar as a pickup in the economy stokes speculation that the central bank will start to raise interest rates next year.
Hedge funds and other large speculators cut so-called net shorts by 25,643 contracts to 15,370 contracts in the week ended March 18, the second biggest reduction on record, while longer-term investors such as pension funds bet on an advance for a second week, according to data from the Washington-based Commodity Futures Trading Commission.
I’ve already pointed to this unwind but before anyone celebrates too hard (given it’s a tragedy!) let’s remember that hedgies remain net short, or were a week ago, probably not now. The SMH also underplays global forces in the dollar’s gain, failing to mention the rise in the US interest rate differential and missing what matters about China:
“Shorting the Aussie dollar for structural reasons was a popular position going into 2014,” Brian Daingerfield, a US-based currency strategist at Royal Bank of Scotland. “Now, the data there has looked quite a bit stronger and the Reserve Bank of Australia has shifted to a more neutral outlook.”
Traders who, at the start of the year, expected the Aussie to suffer amid a slowdown in China, have been caught off-guard as the economy starts to rebalance away from its dependence on commodities-led growth.
Citigroup Economic Surprise Index for Australia, which measures the gap between data reports and strategists’ estimates, rose this month to the highest level since May after improvements in growth and employment.
“The markets are recognizing that the drivers for Australia’s economy are becoming increasingly diverse and much of the potential negative impulses from China appear priced in now,” Rick Harrell, a Boston-based senior sovereign analyst at Loomis Sayles.
Diverse, hmm, iron ore plus houses. A Chinese slowdown is priced so long as there is enough stimulus to prevent a further iron ore rout. That is, so long as there is no slowdown. If not, the currency tide will reverse sooner rather than later.
