Hedge funds are giving up on the Australian dollar.
Optimism has evaporated as the prices for iron ore, Australia's biggest export earner, plunged. Leveraged funds cut net long positions to 12,879 contracts in the week through May 9, the sixth straight reduction and down from as high as 53,601 at the start of March, according to data from the Commodity Futures Trading Commission.
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A big week for the AUD, USD
With China still in the spotlight and expectations elevated for a hike in June from the Federal Reserve, this week's Australian economic data could be highly influential for the AUD. This video was produced in commercial partnership between Fairfax Media and IG Markets.
Rising Chinese iron ore stockpiles are fuelling concerns over the extent of the price rout, after the steelmaking ingredient hit a six-month low last week. The narrowing bond yield differential between Australia and the US, given expectations for a rate increase by the Federal Reserve in June, adds to the concerns that have made the Aussie the worst-performing Group-of-10 currency in the quarter.
The Australian dollar was at 74.16 US cents as of 6:10am on Tuesday, having dropped 3.7 per cent in the past three months.
"With iron ore prices for September delivery loitering under 460 yuan per metric ton, any further leg lower would be a cue for leveraged funds to turn short on AUD/USD," said David Forrester, a foreign-exchange strategist at Credit Agricole CIB's corporate and investment-banking unit in Hong Kong.
Iron ore stockpiles at Chinese ports rose 1.7 per cent to a record 134.25 million tonnes as of Friday, according to weekly data from Shanghai Steelhome E-Commerce Co.
While the potential for Australia to report a current-account surplus in the first quarter may provide some relief for the currency, the impact may be temporary if commodity prices stay lower for longer, Forrester said.
The march of the Fed toward higher US interest rates has also been a factor sapping optimism toward the Aussie.
The extra yield on Australia's 10-year bonds over similar-maturity US securities shrunk to as little as 19 basis points in April, the narrowest since 2001.
"The market has the second of three Fed interest rate hikes penciled in for June and for the frequency of Fed rate hikes in 2018 to decrease," Forrester said. "If that were to increase, it would be another reason to sell AUD/USD."
Bloomberg
Originally published on The Sydney Morning Herald as Why the world is giving up on the Australian dollar.