A high-stakes clash is brewing over the outlook for the Australian dollar as fund managers build a record bet against the currency over souring AI sentiment, locking horns with hedge funds that still expect the currency to rally.
Weekly data from the US Commodity Futures Trading Commission (CFTC) showed asset managers holding a record short position in the Aussie, worth $12.9 billion at October 20.
The massive bet, which makes money should the Australian dollar fall, highlights the new relationship between the risk-sensitive currency and sentiment around the technology sector.
“The Aussie is increasingly becoming an AI trade,” said Oliver Levingston, a foreign exchange strategist at Bank of America.
“The Aussie moves as such a high beta to risk assets, so it makes sense for Aussie shorts to be accumulating as a hedge against an equity market sell-off.”
Levingston said one of the bull cases for the Australian dollar was the huge level of capital expenditure in data centres that would drive economic growth and support the currency.
“We assume that the $180 billion pipeline of data centres will roll out, but if sentiment around AI worsens, it will threaten the pipeline,” he said.
Wall Street has come under pressure recently from a resurgence in the oil price, surging bond yields and a sell-off in the tech sector as confidence in the artificial intelligence trade comes under threat.
Anthropic’s highly anticipated blockbuster initial public offering next month will be the next litmus test for investors.
Australia’s $4.8 trillion superannuation funds, which are heavily exposed to Wall Street, are building short positions in the Australian dollar to offset some of the loss from a global rout in equities.
“As a super fund asset manager, you want that downside risk protection,” said Levingston. “It makes perfect sense.”
And with equity markets starting to show cracks, credit risk rising and the Reserve Bank of Australia closer to the peak of its interest-rate cycle than other central banks, the Bank of America strategist said the pressure points were building in the currency.
Compounding investor fears around the Australian dollar – which is often viewed as proxy for global growth – is a darkening economic outlook.