Australian Dollar Outlook Darkens as Funds Cut Bullish Bets

(Bloomberg) -- Hedge funds are giving up on the Australian dollar.

Leveraged funds cut net long positions to 12,879 contracts in the week through May 9, the sixth straight reduction and down from as high as 53,601 at the start of March, according to data from the Commodity Futures Trading Commission. Optimism has evaporated as the prices for iron ore, Australia’s biggest export earner, plunged.

Rising Chinese iron ore stockpiles are fueling concerns over the extent of the price rout, after the steel-making ingredient slid to a six-month low last week. The diminishing yield advantage of Australian bonds over U.S. Treasuries, given expectations for a rate increase by the Federal Reserve in June, is adding to concerns that have made the Aussie the worst-performing Group-of-10 currency this quarter.

Australian Dollar Outlook Darkens as Funds Cut Bullish Bets

The Australian dollar was at 74.23 U.S. cents as of 3:45 p.m. in Sydney on Tuesday, having dropped 2.7 percent since the end of March.

“With iron ore prices for September delivery loitering under 460 yuan per metric ton, any further leg lower would be a cue for leveraged funds to turn short on AUD/USD,” said David Forrester, a foreign-exchange strategist at Credit Agricole CIB’s corporate and investment-banking unit in Hong Kong.

Iron ore stockpiles at Chinese ports rose 1.7 percent to a record 134.25 million tons as of Friday, according to weekly data from Shanghai Steelhome E-Commerce Co.

Australian Dollar Outlook Darkens as Funds Cut Bullish Bets

While the potential for Australia to report a current-account surplus in the first quarter may provide some relief for the currency, the impact may be temporary if commodity prices stay lower for longer, Credit Agricole’s Forrester said.

The march of the Fed toward higher U.S. interest rates has also been a factor sapping optimism toward the Aussie.

The extra yield on Australia’s 10-year bonds over similar-maturity U.S. securities shrunk to as little as 19 basis points last month, the narrowest since 2001.

Australian Dollar Outlook Darkens as Funds Cut Bullish Bets

“The market has the second of three Fed interest rate hikes penciled in for June and for the frequency of Fed rate hikes in 2018 to decrease,” Forrester said. “If that were to increase, it would be another reason to sell AUD/USD.”

The Australian dollar may be vulnerable to further losses Wednesday if wage data for the first quarter fall short of forecasts, said Peter Dragicevich, a foreign-exchange strategist at Nomura Singapore Ltd.

The wage price index is predicted to stay at 1.9 percent from a year earlier, according to a Bloomberg survey of economists, matching the reading of the previous quarter which was the lowest in data starting in 1998.

“Slippage in annual wage growth would be a surprise and raise some doubts about the timing for a pick up in core inflation" and be a further negative for the Aussie, Dragicevich said.