(Bloomberg) -- Traders are increasingly positioning for the Australian dollar to fall to levels last seen in 2020 as economic data weaken and increased US tariffs look more likely.
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Option trading volume on the Australian dollar versus the greenback on Wednesday surged to the highest in three weeks as the pair hovered not far above 0.6170, its 2022 low, according to data from The Depository Trust & Clearing Corp.
The largest trades involved put options, which gain in value if the Aussie falls. Strikes of 0.60 and lower expiring in April, on their own, saw over a notional billion Aussie dollars of trading. That’s after leveraged funds increased their short Aussie position to 37,708 contracts at the end of 2024, the most bearish since March 2022, according to Commodity Futures Trading Commission data.
“There has been an increase in FX option activity with the Australian dollar versus the dollar hovering near the lows of 2022,” said Con Davelis, head of FX option trading at National Australia Bank Ltd. in Sydney. “Market flow currently feels like the usual importer/exporter demand in FX options.”
If the Aussie breaks 0.6170, macro hedge fund demand is likely to increase as it “opens the door to a more significant move lower,” Davelis added. The currency dropped as low as 0.5510 in March 2020.
Despite the threat of the Aussie dollar breaching the 2022 low, the premium to hedge the currency pair’s downside over the next three months, compared to its upside, remains well below levels from August or October.
“The market has seen a significant supply of volatility, typically associated with AUD/USD corporate hedging, resulting in a compression of the risk reversal curve from the highs of late December,” said Mayank Navalakha, head of FX options trading at ANZ Banking Group Ltd.
He also noted that demand for downside options has been noticeably less than for other Group-of-10 currencies such as sterling, which fell Thursday to its lowest against the dollar since November 2023, and the euro.
The Aussie is under growing pressure on several fronts. A decline in an inflation measure spurred traders to price in a greater chance the Reserve Bank of Australia will cut interest rates next month. Thursday’s disappointing retail sales data just added to the rate cut case. And worries about further US tariffs under President-elect Donald Trump continue to swirl.