Asset managers build record Australian dollar shorts amid risk-off shift

Asset managers have amassed record bearish positions against the Australian dollar due to escalating US-Iran tensions and fears of an AI-driven equity correction, according to Bloomberg. In the week ending October 20th, net short positions surged by 12,901 contracts to 129,065, marking the seventh consecutive weekly increase. This shift in positioning came alongside a broader sell-off in global equities and increased demand for the US dollar as a safe-haven asset.

Rodrigo Catril, FX strategist at National Australia Bank, attributed the rise in short bets to heightened geopolitical risks and the likelihood of a correction in AI-related equities. Meanwhile, leveraged funds added 2,628 contracts to their net long Australian dollar positions, reversing four weeks of reductions. The Australian dollar has fallen from a four-month high of 70.33 US cents to trade around 70.33 cents, as investors reassess global risk appetite and the nation's monetary policy.

Now, focus is shifting to Australian inflation data ahead of the Reserve Bank of Australia's November 3rd policy meeting. Swaps markets price a 64% chance of a 25-basis-point rate increase after Assistant Governor Sarah Hunter suggested the central bank's inflation-fighting efforts were not yet complete. Catril warned that stronger-than-expected inflation could force bearish investors to unwind their short positions, while a weaker reading could lead to further Australian dollar weakness.