CQS founder and CEO Michael Hintze recently joked that his decision to short the Australian dollar was a patriotic one, in line with central bank wishes.
“There is no question the RBA [Reserve Bank of Australia] made it clear that it was in the best interest of the Australian economy for the currency to be lower,” said Hintze, FINalternatives reports. “So at that stage you do your patriotic duty and try to help. That’s tongue in cheek but it was a fair trade.”
Hintze shorted the Australian dollar last year when it was trading at $0.94, and presumably got out when it was hovering around the high $0.80s before returning to $0.94 now. The Australian dollar was in the $1.05 range for much of 2012 and 2013 before it started dropping to its current levels.
Odey Discusses Howard Marks’ Astute Observation On Why Hedge Fund Alpha Is Increasingly Rare [January Letter]
According to a copy of the firm's January investor update which ValueWalk has been able to review, the Odey Asset Management Odey Special Situations Fund returned 7.7% in January, outperforming its benchmark, the MSCI World USD Index, by 8.7%. Q4 2020 hedge fund letters, conferences and more The $60 million fund, which Adrian Courtenay manages, Read More
A weak Australian dollar is good for exports
The RBA wanted to see the Australian dollar depreciate because it helps keep exports competitively priced, spurring stronger growth as Australia is trying to fully recover from the global financial crisis along with the rest of the world. Having a weaker Australian dollar now will also help the country absorb some of the inflows that it can expect as a side effect of tapering.
Tapering could indirectly prop up Australian dollar
One of the side effects of qualitative easing was abnormally high flows of capital to emerging markets, which “should have led to a counter-cyclical policy in EM countries to slow the pace of credit creation through an appreciation of nominal exchange rates and/or the raising of rates,” explains CQS senior adviser Bunt Ghosh, in a presentation sent to shareholders.
Instead, EM central banks decided to keep rates low and benefit from strong growth. The divergence between the Taylor Rule that central banks generally use as a touchstone and actual EM policy rates shows just how loose monetary policy really was. Now that tapering is essentially putting a brake on the growth of the world’s money supply, those inflows are turning into sharp outflows, and developed markets (like Australia) can expect to be the beneficiaries. Many central banks are blaming the Fed for their problems, but “The lack of coordination isn’t the issue; paying penance for earlier episodes of policy inactivity perhaps is,” writes Ghosh.
Ghosh is more concerned with assessing the ongoing impact that Fed tapering will have on EM, but if the RBA is still concerned about its currency becoming too strong relative to the US dollar, the 10 cent drop over the last year will be a welcome buffer if money starts coming in and pushing the Australian dollar up.