By Julie Haviv
NEW YORK, April 18 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
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
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
"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
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.