Hedge funds bet Aussie will be scuppered by sluggish inflation


  • Business
  • Monday, 29 Jul 2019

The currency slid about 1.5% over the five days through Friday as influential Westpac Banking Corp economist Bill Evans brought forward his forecast for the next interest-rate cut to October, and Reserve Bank of Australia governor Philip Lowe(pic) said he was ready to ease again to revive economic growth.

SINGAPORE: Australia’s dollar took a beating last week and worse may be to come in the form of quarterly inflation data due Wednesday.

The currency slid about 1.5% over the five days through Friday as influential Westpac Banking Corp economist Bill Evans brought forward his forecast for the next interest-rate cut to October, and Reserve Bank of Australia governor Philip Lowe said he was ready to ease again to revive economic growth.

The one-two punch put an end to a one-month rally in the Aussie and ensured the currency remained in a long-term downtrend, capped by its 200-day moving average. Slow stochastics, an indicator of momentum, suggests more weakness lies ahead at least in the short term.

Leveraged funds are among those betting on further losses. They held a net short position of 16,868 contracts for the week ended July 16, close to the most bearish this year, according to Commodity Futures Trading Commission data.

Overnight interest-rate swaps are pricing in a 90% chance of a rate cut in October, up from 40% odds at the start of last week. That would be the third reduction this year following moves in June and July that have pushed down the benchmark to a record-low 1%.

The next leg down in the Aussie may be triggered by Wednesday’s inflation data. Economists predict the trimmed mean reading will fall to 1.5% for the second quarter, which would be the lowest since December 2016.

The gauge has remained stubbornly below the central bank’s 2%-to-3% target range for more than three years.

Speaking on Thursday, Lowe flagged the importance of keeping borrowing costs low until inflation recovers. “On current projections, it will be some time before inflation is comfortably back within the target range,” he said at a speech in Sydney.

A further batch of disappointing inflation data may see investors boost pricing on another rate cut even further, and bring a smile to the face of Aussie bears. — Bloomberg

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