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  • Hedge funds have turned net-long the Aussie dollar 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. 
  • CME Group data on option strikes suggests continued bearish demand on the Aussie dollar around 0.645, with bearish bets particularly increasing below 0.633. The effectiveness of China’s efforts to stablise its property sector and thus boost demand for iron ore will be an important factor in lifting the Aussie dollar. 
  • Meanwhile, the FX volatility curve using CME Group options data suggests investors have become less fearful over the last month. 

The Aussie dollar has fallen 3.5% (vs USD) over the past month but has been broadly flat over the last three months.

We highlight three points on the Aussie dollar:

  1. Markets are 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. 
  2. The Aussie dollar has slightly decoupled from iron ore prices, which have rebounded to $117 from around $103 since the start of August. China continues to announce measures to support its property sector, such as making it easier to be classed as a first-time buyer and reducing the interest rate on existing mortgages. 
  3. Interest rate spreads versus the U.S. have moved against Aussie. The 2Y AUD vs USD OIS swap spread has widened further despite increasing signs that the U.S. labour market is slowing, as shown by a lower quits rate. 

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. We also find that hedge funds have increased their bullish bets on the Canadian dollar, Swiss franc, and sterling since last month. Meanwhile, bearish bets against the Japanese yen, and bullish bets on the euro have fallen (Chart 1). 

However, asset managers continue to increase their bearish bets on the Aussie dollar. Net short positioning has increased by more than 42,00 contracts to over 91,000. In general, we see asset managers becoming increasingly bullish on the U.S. dollar more broadly, as positioning among most major currencies waned over the last month. Sterling stands out as the only currency where asset managers have increased their net longs over the last month (Chart 2). 

Aggregating investor positions, we find that bearish bets against most major currencies have increased since last month, except against the Swiss franc and sterling. Data for the Swiss franc shows that net shorts have fallen since last month, whereas bullish bets on sterling have risen, standing out as the only major currency to have seen an increase in bullish bets since last month.

Macro Hive take: 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. 

Option strikes

The Australian dollar is around its year-to-date lows of 0.645 (as of 4 September). We see notable demand for the Aussie dollar above 0.668 to 0.680. However, at current levels, net option strikes are firmly bearish. We also highlight that bearish bets particularly increase around 0.620 to 0.633. However, that level is some way off.

What to watch: We continue to pay special attention to China’s stimulus measures, which could provide the Aussie dollar with a bid if they halt the property market decline. This will support further imports of iron ore, and copper, which is an important part of the Australian economy

FX investor risk appetite

CME Group has a range of FX volatility data to help investors track the level of volatility. We can also use FX volatility data to determine investor risk appetite. We find the shape of the FX volatility curve useful in this regard. When shorter-dated FX implied volatility is higher than longer-dated volatility, this suggests investors are worried or in panic mode. In contrast, when shorter-dated FX volatility is lower than longer-dated volatility, this suggests investors expect calm markets. The latest data finds:

The FX volatility curve is flattening, having temporarily steepened to more bearish territory during the middle of August – this aligns with the iron ore price bottom and China stimulus announcements. It suggests investors may have become less fearful of a hard landing in China. 

This move also aligns with the CME’s CVOL volatility indices, which have fallen slightly since mid-August. However, the move is less pronounced, and further weakness in the Aussie dollar suggests we have probably seen the bottom in interest rate volatility for AUD in July.

Outside FX, equity volatility has continued to trade at low levels. Meanwhile, interest rate volatility remains historically elevated despite being pared from 2023 extremes.

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