(Bloomberg) -- Institutional investors turned most bullish on the Australian dollar since March 2021 as signs the nation’s central bank will keep interest rates at elevated levels and China’s stimulus push revived confidence in the currency.
Asset managers flipped to a net long Aussie dollar position in the week ended Oct. 8, according to Commodity Futures Trading Commission data. That’s after being bearish on the currency since Feb. 2023.
The Reserve Bank of Australia signaled plans to hold interest rates until inflation slips toward its target, a move that favored the local currency versus those with dovish central banks. An improving view of China, Australia’s largest trading partner, also helped both asset managers and hedge funds simultaneously turn bullish on the currency for the first time since May 2021.
“We prefer to position for the Aussie to rebound on China-related selloffs, unless the ‘policy put’ fades,” said Lenny Jin, a strategist at HSBC Holdings Plc in Hong Kong. The Aussie will also be supported by central banks cutting rates while the RBA maintains a restrictive stance for longer, he said.
The Aussie dollar rallied to the highest in 19 months in late September following China’s stimulus announcement. However, it has fallen about 2.5% this month due to disappointment over a lack of follow-up policy measures from Beijing and expectations of smaller Federal Reserve rate cuts.
It was down 0.2% at 67.39 US cents on Monday afternoon with Chinese stocks fluctuating after a Finance Ministry briefing on Saturday underwhelmed investors.
Asset managers’ bullishness on the Aussie dollar may be premature, with a momentum indicator signaling further downside for the currency. Along with uncertainties on China’s stimulus measures, Australian employment and inflation data due this month may also induce caution due to their potential to sway RBA bets.
“The position flip to longs is understandable, but it has to navigate a lot of consequential risks in coming weeks,” said Richard Franulovich, head of FX strategy at Westpac Banking Corp. “I’d prefer to be square” and go long Aussie at better levels toward support at 66.30 cents, he said.
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