Option traders are more bearish on the Aussie than any other G-10 currency as the risk-sensitive asset suffers from a sudden escalation in US-China trade tension and a slowing economy. Investors are pricing around a 60 per cent chance that the Reserve Bank of Australia will cut interest rates in June, overnight index swaps show. A rise in the unemployment rate in April strengthened those calls Thursday and sank the Aussie to the lowest since January.
“I’d be long dollar versus the Aussie right now with something like the mid-60s a reasonable target,” said Stephen Miller, an adviser at GSFM in Sydney and a former head of fixed income at BlackRock’s Australian business. “If I were looking for ways to play the trade war, and with growth cooling, shorting the Aussie would be one of them.”
At 10.40am AEST on Friday, the Australian dollar is fetching around 68.90 U.S. cents.
Support for the Aussie is being further eroded by softness in the Chinese economy, its largest trading partner. With China’s factory output, fixed asset-investment and retail sales all missing estimates in April, it raises questions over demand for Australian commodities.
“The Australian dollar is still a global hedge, it’s a liquid proxy for an exposure to things going wrong especially in China,” said Sebastien Galy, senior macro strategist at Nordea Investment Funds SA in Luxembourg.
Adding to the Aussie’s conundrum is rising political risk ahead of a vote on May 18. Incumbent Prime Minister Scott Morrison and his party are trailing the Labor party in the polls.
A Labor win may lead to a “fractious political climate” and uncertainty over whether the party would be able to pass key revenue-raising measures, such as reducing tax benefits for some shareholders and property investors, which could weigh on consumer and business sentiment and, in turn, the Aussie, Nomura strategists including Andrew Ticehurst wrote in a note.
Among those more bearish longer term, asset manager AMP Capital sees the Aussie dropping to 65 US cents amid concerns over global growth and downward correction in the local equity market, according to Nader Naeimi, head of dynamic markets.
Still, not everyone is convinced selling the Aussie is a strong bet. While speculative investors have maintained shorts over the past year, their positions are less bearish than six months ago, data from the Commodity Futures Trading Commission show.
Monex Group, which submitted the most accurate prediction for the currency in Bloomberg’s first-quarter rankings, reckons market expectations of two interest-rate cuts by the RBA this year look overdone.
“As long as the labor market holds up, the central bank will be willing to delay cutting rates — so the risks to the RBA path are skewed to the upside of current expectations,” said Ranko Berich, head of market analysis in London.
“We maintain our view that AUD/USD will trade at 0.69 by the end of 2019.”