RPT-Options investors become more bearish on Aussie dollar

Thu Apr 18, 2013 7:57pm EDT

By Julie Haviv

NEW YORK, April 18 (Reuters) - Concerns about China's slowing growth and gold's recent descent to a two-year low led to steep losses in the Australian dollar this week, prompting investors in the options market to pile on hedges against further weakness.

While the bias in the options market has long been leaning toward a decline of the Aussie versus the U.S. dollar, in recent days investors have upped the ante, fretting about Australia's economic vulnerabilities.

Three-month risk reversals, a broad gauge of short-term currency market sentiment in Aussie/U.S. dollar, are skewed toward puts, or the right to sell Aussies at a future date. But on Wednesday, they traded as high as 2.1 percent, the largest bias for puts in over a month.

"We've seen an increase in demand for downside protection on the Aussie following this gold price meltdown," said David Rodriguez, quantitative strategist at DailyFX.com in New York.

Spot gold rose on Wednesday, bucking the fall in oil and other commodities, but sentiment was still severely shaken by the biggest two-day loss in 30 years that started last Friday. With Australia's economy heavily based on resources, a decline in commodity prices could undermine sentiment.

"While short-term risk reversals have had a negative skew for as long as I have reliable data, which is about 10 years, we have seen a noteworthy build in these bearish bets in the past several days," he said.

A CHILL FROM CHINA

The Aussie, last trading at US$1.0284, plunged as much as 4 percent earlier this week, the largest one-day loss in two years. It remains far below a three-month high of $1.0585 touched last week.

"The options market is reflecting the potential for price depreciation based on the economy's fundamental weakness, with its link to the Chinese economy," said Ben Emons, senior vice president/global portfolio manager at Newport Beach, California-based PIMCO, which had $2 trillion in assets under management as of Dec. 31.

China's annual economic growth unexpectedly eased back to 7.7 percent, disappointing investors looking for a reading above 8 percent. The Aussie is sensitive to news out of China, a key export market.

"The Aussie should move more toward US$1.02 over the next three to six months, which is still a reasonable move from current levels," he said.

To be sure, the Aussie's downside is also seen as limited because its primary appeal to investors is a comparatively high interest rate of 3 percent versus other developed countries, with rates in the United States and Japan at or near zero.

Earlier this month, the Bank of Japan announced a massive bond-buying program that crushed Japanese government bond yields. That could eventually buoy the Aussie as Japanese investors search elsewhere for higher yields.

Emons, who oversees $70 billion in global assets, said he expects the Aussie to remain more range-bound, reflecting a neutral stance that is skewed toward the lower end of a US$1.02-to-US$1.05 range.

Three-month implied volatility, a gauge of price movement that is used for options pricing on the Aussie/U.S. dollar, has also spiked in recent days.

"Even with the jump in volatility, Aussie options remain fairly cheap," DailyFX's Rodriguez said.

"It makes sense to see demand for relatively inexpensive downside protection, given the fairly clear risk of a continued selloff in gold," he said.

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