Australian Dollar’s 27% Rally Is Squeezing Bearish Hedge Funds

(Bloomberg) -- The Australian dollar’s relentless rally is prolonging the pain for hedge funds that have been betting against it all along the advance. They’re hoping that economic data this week will bring succor.

The currency, which is a proxy for risk appetite, has rallied as much as 27% against the greenback from a 18-year low in mid-March amid expectations of a global economic recovery on easing lockdowns. The Reserve Bank of Australia refrained from talking down the currency last week, fueling further gains.

Meanwhile, hedge funds wagering that a slowing economy will trim the currency’s gains are feeling the squeeze. Patience is running thin as trade tensions with China, the biggest importer of Australian commodities, did little to damp the Aussie’s strength.

Hedge funds held short positions in excess of 15,400 contracts as of June 2, the largest in two months, according to Commodity Futures Trading Commission data. Their pain is compounded by the fact that they held a net long position for seven weeks before deciding go short in March.

Technical data is offering solace to these hedge funds as the currency pair failed to breach initial resistance at a December high of 0.7032 last week. Furthermore, the Australian dollar is in overbought territory, according to slow stochastics, a momentum indicator, signaling that further upside maybe limited.

Australia’s consumer and business confidence data this week may help these hedge funds if they show that animal spirits are yet to make a come-back. Otherwise, their pain could be extended.

“In the near term, the AUD will remain supported, possibly breaching 0.70 as the market keeps its focus on positive news,” says Eugenia Fabon Victorino, head of Asia strategy at SEB in Singapore. “The RBA’s clear aversion to pursuing negative rates provides a firm back stop to any downward correction to the currency.”

Below are the key Asian economic data and events due this week:

• Monday, June 8: New Zealand 1Q volume of all buildings, Japan current account and 1Q GDP
• Tuesday, June 9: Australia business confidence and job advertisements, New Zealand business confidence, Japan labor cash earnings
• Wednesday, June 10: Australian consumer confidence and home loans, New Zealand 1Q manufacturing activity, Japan PPI and core machine orders, China CPI and PPI, Philippines trade balance
• Thursday, June 11: New Zealand retail card spending, Japan 2Q BSI large manufacturing, Malaysia industrial production
• Friday, June 12: New Zealand manufacturing PMI, Japan industrial production, Indonesia consumer confidence, India CPI and industrial production

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