Aussie dollar's strength surprises hedge funds boosting bearish bets

Sydney

STRENGTH in the risk-sensitive Australian dollar amid the war in Ukraine has surprised hedge funds that bet against the currency, raising the prospect of further gains to cover short positions.

Leveraged funds boosted net short positions on the Aussie by 47 per cent to 46,907 contracts in the week ended March 8, the most since September 2015, according to the latest data from the Commodity Futures Trading Commission. Yet the currency touched a four-month high last week and has been the best performer among Group-of-10 currencies since Russia invaded Ukraine on Feb 24.

"It suggests that speculative traders have been disbelieving of the commodity-price driven rally in the Australian dollar and believe that negative risk sentiment will ultimately overwhelm and push the Aussie lower," said Ray Attrill, head of foreign-exchange strategy at National Australia Bank in Sydney. "If commodity prices relevant to Australia stay high, and there is every reason to believe they will, then together with still-extended short positioning, the potential for a bigger short covering rally in AUD/USD at some point is very high."

The war has accelerated a recent surge in commodity prices, weighing on traditional havens such as the yen due to the prospects for wider trade deficits. The Swiss franc has fallen in part because of the country's proximity to the conflict area.

"One potential factor that may offset Australia's traditional position in markets as a 'risk on' asset is its remoteness from Ukraine and Russia," Bill Evans, chief economist at Westpac Banking Corp, wrote in a research note. "As risk concerns gradually ease through the second half of 2022, and the RBA begins its own tightening cycle by August, the boost to the Australian dollar from the elevated commodity prices can be more sustained." BLOOMBERG