Hedge funds bet on Aussie dollar slide

LONDON Fri May 24, 2013 12:12pm EDT

LONDON May 24 (Reuters) - Hedge funds hungry for trade ideas after the success of their bets on Japan's recovery have been turning their attention to the Australian dollar, betting the end of the commodities boom will drive down the currency.

Funds have been watching for signs of weakness in the Aussie dollar, which was one of the most in-demand developed world currencies after the credit crisis due to Australia's rapid economic growth, attractive yields and healthy financial system.

While some funds have been short for some time - a costly trade as the Aussie has strengthened - more managers have joined them in recent weeks, enticed by signs of domestic economic weakness and the likelihood of a further interest rate cut after rates hit a record low this month.

The downside of a strong currency was highlighted when Ford said it would shut its two auto plants in Australia. The dollar has also hit government revenues and the central bank's growth outlook.

"We think the Australian dollar will come down and come down hard," said Stanley Druckenmiller, founder of former hedge fund Duquesne Capital, at the Sohn Investment Conference in New York this month.

"We're betting ... this is the end of the big supercycle in commodities that started 10 years ago," he said. "I would avoid all commodity currencies, such as Brazil, South Africa and Canada and I would short the Australian dollar."

Funds have mainly shorted the Aussie against the U.S. dollar, which has gained as the U.S. economy has recovered. But some have shorted it against non-commodity emerging market currencies, said Anthony Lawler, portfolio manager at GAM.

The Aussie soared from less than 65 cents in late 2008 to $1.10 in summer 2011, as investors sought refuge from the credit crisis in a country that has now racked up 21 years continuous of growth.

The currency has largely range-traded since then, but since April 11 it has lost around 8 percent.

Funds point to falling commodity prices driven by a slowdown in China - Australia's biggest export market - while mining service firms have been hit by profit warnings.

There are also signs consumer confidence is falling, while some see issues with Australia's banks, which are more reliant than international peers on wholesale funding.

"In the short term Australian banks are a danger zone," said Toscafund founder Martin Hughes, one of the UK's top investors. "Things are not as benign as the market is implying."

Andy Seaman, partner at Stratton Street Capital, which has $2 billion under management and advice, said he is short the Australian dollar in his hedge fund.

Seaman uses 'net foreign assets' - total assets a country owns abroad minus domestic assets owned by foreigners - to assess a country's debt level. He thinks AAA-rated Australia, whose current account balance widened in the fourth quarter on a year ago, could be downgraded.

"BANDWAGON"

Industry executives say bets against the Aussie have been increasing this year, although they are not of the same magnitude as hedge funds' bets on Japan.

According to U.S. Commodity Futures Trading Commission data, short bets by leveraged funds against the Aussie rose by more than 17,300 to nearly 69,000 contracts over the week to May 14, while long positions rose by nearly 2,000 to close to 73,500.

"(It's) a way of playing a number of ideas - the weakening commodity trade, the China slowing growth story and Australia joining the interest rate cutting party. It's become quite a rapidly populated trade by the macro players," said Aberdeen's global head of hedge funds Andrew McCaffery.

"Now it is showing signs of momentum it is likely to entice more people in. However, if it doesn't break through key support in the mid-90s (cents), given there is a cost of carry ... you might see some profit taking..."

Some see dangers of overcrowding. Bob Jolly, head of global macro at Schroders, has been shorting the Aussie dollar, initially against Asian currencies and then against the U.S. dollar, but covered the position in recent days.

"I think a fair amount of people have been jumping on the bandwagon," he told Reuters. "We were nervous about how crowded the trade was becoming." He said he took a small long position on the Aussie against the yen on Thursday.

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