Hedge funds with bearish positions on the Australian dollar are facing potential losses as the currency shows resilience despite negative market sentiment, according to a report by Bloomberg citing RBC Capital Markets and Westpac Banking Corp.
Many of the anticipated risks, including fears of US tariffs, may already be priced into the Aussie, which is now benefiting from a shift in market conditions, according to Westpac’s Head of Foreign Exchange Strategy Richard Franulovich.
The Australian dollar has gained 2.7% against the US dollar this year, making it the third-best performer among Group-of-10 currencies. A reduction in global trade war concerns has boosted risk assets, and the Aussie hit its highest level since December, closing last week at 63.52 US cents.
According to RBC Capital Markets, the Australian dollar could rise further, potentially reaching 64.50 US cents if the Reserve Bank of Australia (RBA) surprises the market by holding interest rates steady this week. Westpac is also anticipating further near-term gains for the Aussie.
“AUD/USD has been surprisingly resilient despite repeated tariff shocks, a stark contrast to the fourth quarter,” said Franulovich.
The rebound presents a challenge for hedge funds, which were holding a net short position of 44,643 contracts on the AUD/USD pair as of last Tuesday, according to Commodity Futures Trading Commission data. While many expected the RBA to cut interest rates for the first time since November 2020, these rate cuts are already largely priced in, and further cuts could already be reflected in the currency’s value.
Market participants are pricing in over three 25-basis-point cuts this year, with an 87% chance of a rate cut this week. However, hedge funds face a near-term risk if the RBA surprises with a more hawkish stance, citing a strong labour market or inflation risks from potential higher US tariffs. If the RBA delays a rate cut or signals a more hawkish outlook, the Aussie could surge to as high as 64.50 US cents, according to RBC.
