The Australian dollar became hot and noticeable after rumors that George Soros was shorting the currency surfaced earlier this month. George Soros reportedly placed a $1 billion bet on the fall of AUD on May 6th. The bearish position from Soros, who is known for his big bets against currencies is not the only such incident. Stanley Druckenmiller is the other bear of AUD. He recommended the currency as a short idea in the Ira Sohn Conference.
Australia relies greatly on exports to China and is has a currency heavily linked to commodities. Australia’s major industry is mining, with iron ore, copper, gold and other metals as the backbone of its growth. Reduced demand of raw material from China has been slowly having its effect in Australia, and the same points were also argued in Stanley Druckenmiller’s presentation.
AUD Has Risen 6.4 Percent Against USD
While growth slowed in Australia, its dollar has continued to strengthen. Between June 2012 and April 2013, AUD has risen 6.4 percent against USD. This rise has increased export costs and has weighed down non-industrial businesses like tourism. The Australian central bank has indicated that it will cut rates and did so on May 7, to a record low of 2.75 percent from 3 percent. As AUD declined, short bets on the currency stacked up.
According to CFTC data, short contracts in AUD futures and options initiated by leveraged funds such as hedge funds and CTAs rose to 67,972 positions on May 14, a 34 percent increase to the 50,576 short contracts that were held till May 7. The current level of short positions is almost double the 35,433 contracts that were held at the end of December. Net long positions by hedge funds have fallen from 116,705 at the end of 2012 to 72,680 on May 14. Of the total 162, 867 active contracts held by hedge funds in AUD futures, 41 percent were held in short bets till May 14.
In addition, long contracts held by asset managers and institutional investors fell from 1670 contracts till May 7 to only 391 on May 14. Shorts are on the rise among asset managers and other reportable and non-reportable categories as well. On a comparative basis, long to short ratio in AUD is nowhere comparable to the high short interest in EUR and JPY futures, nonetheless AUD bears are gradually picking up speed.
The short interest ratio on CurrencyShares Australian Dollar Trust (NYSEARCA:FXA), another proxy for performance of AUD against USD and a investor sentiment indicator, had risen to 33 percent by May 3. This marks a 54 percent increase to the short interest ratio recorded on Dec 31, 2012. Just like positioning in AUD futures on Comex, here also the highest percentage of shorts have been recorded in CurrencyShares Euro Trust (NYSEARCA:FXE) and CurrencyShares Japanese Yen Trust (NYSEARCA:FXY) where short interest ratio is at 211 and 171 percent respectively.
Australia’s lower dollar can help boost earnings for the core Aussie industry, mining. It is also a common belief that the fiscal easing plan from Reserve Bank of Australia will support resource stocks in outperfoming, while yield stocks will underpeform. If the Aussies continue to cut interest rates, the short bets on AUD will pile up further. Currently AUD trades at 0.9805 of USD, the currency has declined 5.5 percent YTD and is down 3.72 percent since the May 7th rate cuts.
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