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Aussie Options Reveal Limit to Rally Disrupting RBA: Currencies

(For a Currencies column daily alert: SALT FXCOL.)

May 19 (Bloomberg) -- The end of the Australian dollar’s longest rally in four years is starting to be seen in the options market.

Derivatives that give the buyer the option to sell the Aussie against the U.S. dollar, or puts, have made up a majority of trades for the past five weeks, reaching 66 percent after being as low as 42 percent the second week in April, according to Depositary Trust & Clearing Corp. data compiled by Bloomberg. The currency, which is up 8 percent from its low this year on Jan. 24, is on pace for its fourth-straight monthly gain.

The Reserve Bank of Australia would welcome relief from a rising currency, which officials last month described as high by historical standards and a risk to exporters amid a slowdown in China, the nation’s largest trading partner. The gains have been driven by reserve managers snapping up government debt with the highest yields among its AAA-rated peers.

“The professional or hedge-fund universe still has a negative bias on the Australian dollar as a result of being closely linked to China,” Neil Azous, the founder of Stamford, Connecticut-based research firm Rareview Macro LLC, said May 15 in a telephone interview. That analysis “of the options market suggests there’s a downside bias to Aussie dollar.”

Raising Forecasts

Strategists have been busy trying to keep up with the Aussie’s gains, raising their median year-end forecast to 89 U.S. cents from 85 in February. Futures traders are the most bullish in a year.

Australia’s legal tender has gained 5 percent versus the U.S. dollar this year, the third-biggest jump among 16 major currencies tracked by Bloomberg, to 93.60 U.S. cents last week in New York.

“Reserve managers continually buy Aussie dollar because it gives has the highest yield for a AAA nation,” Azous said.

The nation’s two-year government bond yielded 2.7 percent, the highest after lower-rated Iceland’s 4.5 percent among 21 developed sovereign markets tracked by Bloomberg.

Among nations with the highest ratings, similar maturity debt yielded 1.04 percent for Canada, 0.09 percent for Germany and negative 0.1 percent for Switzerland. Notes sold by the U.S., whose credit was downgraded from AAA by Standard & Poor’s in 2011, yielded 0.36 percent.

Bullish Bets

Hedge funds and other large speculators are the most bullish on Australia’s currency versus the U.S. dollar in a year, figures from the Washington-based Commodity Futures Trading Commission as of May 13 show.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the Australian dollar compared with those on a drop, net longs, totaled 17,127 contracts on May 13.

The Aussie is about even with its 93.62 level on April 15, when the RBA Governor Glenn Stevens and his board said in the minutes of that month’s policy meeting that achieving “balanced growth” would be more difficult “given the rise in the exchange rate over the past few months.”

As predicted by all 33 economists surveyed by Bloomberg News, the central bank refrained from raising the overnight cash-rate target from a record 2.5 percent even amid signs of a real-estate bubble. Policy makers reiterated that the most prudent course is likely to be a period of steady interest rates.

Housing Rally

Property-market prices have increased for six straight quarters amid the low borrowing costs. The median house and apartment price in Australia’s eight biggest cities rose 10.9 percent in the first quarter from a year earlier, with Sydney’s 15.7 percent increase leading the gains, according to a release by the Australian Bureau of Statistics.

At the same time, there are signs that the world’s second- biggest economy is faltering.

China’s manufacturing contracted for a fourth month in April, according to a private survey that missed estimates, adding to concern the slowdown in Australia’s biggest trading partner is deepening. Gross domestic product is forecast to expand 7.3 percent this year, compared with 10.4 percent in 2010 according to Bloomberg surveys.

In the options market, Australian-dollar-put trades have exceeded calls since the week ended April 19, topping out at 66 percent two weeks later, DTCC data compiled by Bloomberg show. They made up 62 percent of a notional A$10.1 billion in trades last week.

Traders may be betting that the central bank won’t tolerate much more Aussie strength, believing that gains to 95 U.S. cents may spur policy makers to take action to weaken the currency, according to Bank of America Corp.’s John Hopkinson.

“It’s well established that the RBA in the past has talked about the currency at these levels being overvalued by a decent amount,” Hopkinson, head of quantitative foreign-exchange research at Bank of America Merrill Lynch in New York, said May 15 by phone. “It’s natural from a value perspective that you’d want to buy puts.”

--With assistance from Brendan Murray in Washington and Michael Heath in Sydney.