Shorts in AUD compared to long positions peaked on July 2, according to CFTC’s weekly report. Aussie has taken the worst beating among developed nation currencies, sliding 9.4 percent in the last three months. As net short positions (the difference between long and short) claim previously unseen highs, the prediction is that it is time for the currency to get back up, signaling a short squeeze. The net short positions in AUD futures and options by all kinds of money managers were up to 70,515 contracts as of July 2.

See Stanley Druckenmiller Following Soros into Australian Dollar Short?

AUD Short Interest Hits Record High as RBA Rate Cuts Expected

Hedge Funds Bet Against AUD

Several famous hedge funds have bet against the Australian dollar, including George Soros, Stanley Druckenmiller, Ray Dalio, and Crispin Odey.  All are reported to have short bets against the Aussie in their respective funds. Societe Generale’s FX Quant Fund gained 1.4 percent in June from betting on the long side of USD and shorting AUD and NOK in its momentum and carry trades.

Reserve Bank of Australia Could Cut Interest Rates To 2.5%

As SocGen points out, short AUD has been a successful trade due to many factors—for one USD has strengthened against AUD on fears of QE tapering. Australian markets have declined in response to Chinese industrial slowdown, which is the largest trading partner of Australia. In addition to all this, investors increasingly think that Australia’s central bank will cut rates, thus further pumping their short positions.  According to Bloomberg’s swaps data, traders find a 54 percent likelihood that RBA would cut down rates to 2.5 percent from 2.75 percent in its next meeting scheduled for August 6. The probability has risen from 45 percent on July 8.

Shorts In AUD Reach New Highs, Hedge Funds ‘Join’ Soros

SG’s quant fund used short carry trade in the G10 and EM currencies. The quant fund uses algorithms to identify low risk trades and has steered clear of pro-risk forex pairs in the last month. The FX Quant fund also bet in favor of the euro and Swedish krona. The fund has maintained low leverage and its positioning equals a 6 percent yearly volatility.

Major movements according to the July 2 CFTC update was the reduction in long EUR futures contracts, down from 76,275 to 48,803 contracts. Hedge funds are stacking up shorts in GBP futures and are again building up negative bets in JPY after they had covered their shorts in the last couple of weeks.

See Hugh Hendry’s Eclectica Battle On BoJ! Gains on Australian Shorts