Forex investors betting Australia's wildfires to hurt currency

Forex investors betting Australia's wildfires to hurt currency

Bushfires in New South Wales, Australia
Firefighters keep a watchful eye on a fire threatening homes along the Princes Highway near in Milton, Australia Jan 5, 2020. (Photo: Reuters/Tracey Nearmy) 

SYDNEY: Foreign exchange investors are increasingly betting that bushfires that have torched a swathe of Australia the size of South Korea will hurt the country's economy, and some are short-selling the Australian dollar in anticipation it will fall.

Hundreds of blazes are raging on the continent's east coast and have already killed 27 people, razed thousands of homes and turned picturesque tourist towns to cinder and ash.

On top of a damage bill likely to run to billions, analysts expect sentiment, spending and tourism, which accounts for over 3 per cent of the economy, all to take a hit.

That has in turn, spurred bets the crisis could push the Reserve Bank of Australia (RBA) to cut interest rates to support already sluggish growth, which would be negative for the currency since it tends to deter capital inflows.

"The fires are definitely an additional weight on the economy, and should lower the barriers for an RBA rate cut," said Terence Wu, a strategist at OCBC Bank in Singapore.

He suggested short selling the Australian dollar as a trade idea in a note to clients on Thursday, targeting a fall to US$0.6728. The Aussie last traded at US$0.6875.

Short sellers benefit from a fall in currency prices by borrowing the currency they want to short, immediately selling it and hoping to buy it back for less - pocketing the difference.

Recent price moves, notwithstanding a boost from better-than-expected retail sales data on Friday, suggest Wu is not alone in his bet.

The currency has had its worst week since September, shedding 1 per cent against the greenback even while other Asian currencies have risen.

Shifts in interest-rate futures pricing also show an increase in bets on a cut to rates when the RBA next meets on Feb 4. The implied probability is shy of even, but has climbed from about a third in December to a little over 40 per cent.

"(The fires) certainly play into the view that the RBA is, at the margin, going to be more inclined to cut rates than they otherwise might be," said National Australia Bank's head of FX strategy, Ray Attrill, who expects a cut in February.

"It's certainly been a factor and that has been reflected in money market pricing."

Insurance losses stand at A$700 million, according to estimates from the Insurance Council of Australia.

Moody's Analytics said the total cost of the fires, which have destroyed more than 10 million hectares of land, could easily surpass that of deadly 2009 blazes that burned 450,000 hectares and cost an estimated A$4.4 billion. 

Source: Reuters/ad