Australian Dollar’s Roller-Coaster Day Leaves Traders Gasping for Breath

(Bloomberg) -- How much is too much? For traders of the Australian dollar, the wild swings on Feb. 21 illustrates why trading the notoriously high-beta currency can at times be almost impossible.

That Thursday started innocuously enough. As traders arrived at their desks, markets were digesting the Federal Reserve’s January minutes released late Wednesday, while U.S.-China trade talks were due to resume in Beijing. The key local event was Australia’s monthly jobs report, which was expected to provide evidence for why central bank Governor Philip Lowe had recently turned more dovish.

What ensued was a roller coaster of a day, with a surge of as much as 0.6 percent countered by two heavy blows that left the Aussie down as much as 1.3 percent. That was the largest intraday gain that reversed to a loss in three months.

Australian Dollar’s Roller-Coaster Day Leaves Traders Gasping for Breath

“I was ready for a normal day, not for the Aussie to descend into chaos,” said Nick Twidale, who traded currencies for two decades and now heads the operations of Rakuten Securities Australia in Sydney. “It gave me flashbacks of the days when Lehman collapsed, of jotting down the huge swings on yellow sticky notes for traders to see and make calls on.”

Here’s a timeline of some of the day’s key events in Sydney time:

9:00 a.m.

Trading desks in Australia take over from New York as the new Asian day gets underway. Hedge funds are adding to short positions on the Aussie before the jobs report, brokers tell Bloomberg. One trader was said to have bought 10,000 March bank bill futures in a wager the data would spur the Reserve Bank of Australia to cut interest rates.

11:30 a.m.

The jobs data beats even the most optimistic forecasts, showing a net gain for January of 39,100 positions. The Aussie leaps to a two-week high of 72.07 U.S. cents in a matter of minutes.

Exporters are caught out by the sudden jump. They had been lining up to buy the currency on any dip to 71.30 or 71.40 (to convert their overseas earnings), but the rally freezes them out, traders say.

Swap markets immediately slash the odds of an RBA rate cut this year to 63 percent from 80 percent. Two brokers who had taken short positions just before the headlines saw losses surge as noon approached but decide to grit their teeth and hold on.

12:15 p.m.

Westpac Banking Corp. economist Bill Evans, who has developed a reputation for accurately predicting RBA policy, publishes his new forecast that the central bank will cut rates twice this year, citing to a dramatic slowdown in growth.

Australian Dollar’s Roller-Coaster Day Leaves Traders Gasping for Breath

The headlines puncture the optimism surrounding the Aussie, seeing the currency slide more than 50 pips to 71.42 cents over the next 20 minutes. Macro funds, who had been forced to close their short positions after the jobs data, eagerly put them back on.

12:20 p.m.

A broker, who had just congratulated a leveraged fund client for going long before the employment data, rushes to cut the position. The result of the trade: a 50 percent loss.

At 33 Alfred Street in Sydney’s central business district, money manager Nader Naeimi sits at his desk at AMP Capital Investors and watches the Aussie’s gyrations on his Bloomberg terminal with some satisfaction.

“It was a good day for me,” Naeimi said. “I didn’t trade the Aussie specifically but I already had a short on.”

2:15 p.m.

Suddenly a gleam of sunlight. A Reuters report citing people familiar says U.S. and Chinese negotiators have drafted outlines for a possible trade deal. Any improvement in global trade is positive for the Aussie, which promptly erases its declines to be back almost where it started the day at 71.68 cents.

3:30 p.m.

The Aussie’s gains peter out as there are no follow-up details on the trade front. Some of the early-starting traders start to think about closing their books for the day and hitting the bars at nearby Circular Quay. Surely there are no more surprises in store?

4:23 p.m.

Headlines suddenly flash across trading screens saying China’s Dalian port has decided to ban coal imports from Australia indefinitely.

The Aussie tumbles once again, sliding more than 30 pips to a new day low.

Still, having been burned once already on the day, funds are wary about opening new short positions, traders say. As a positive straw to hang onto, China’s Commerce Ministry spokesman Gao Feng said he had no information to add, fueling speculation the news may be misleading.

Australian Dollar’s Roller-Coaster Day Leaves Traders Gasping for Breath

5:00 p.m.

For the two traders who started the day with short positions, the unnerving day had ended with a profit as the Aussie was now solidly under 71 U.S. cents, virtually wiping out all the year’s gains. A drink at the Ship Inn awaited. As the focus of trading moved on to London, market watchers were left to mull an eventful session.

“It’s very awkward when the narrative shifts so quickly, not just for intraday traders, but it was a difficult one for all concerned,” said Sean Callow, senior currency strategist in Sydney at Westpac Banking Corp., who has more than two decades of experience. “It would have been a classic day to lose a lot of money.”

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