Multiple bearish factors converge, traders heavily short the Australian dollar.

With economic data weakening and the possibility of the US increasing tariffs, more and more traders are betting that the Australian dollar will fall to its 2020 levels. According to data from the US Depository Trust & Clearing Corporation, options trading volume for the Australian dollar against the US dollar surged to its highest level in three weeks on Wednesday, with the currency pair hovering near the 2022 low of 0.6170. The largest trades involved put options. Contracts expiring in April with strike prices at or below 0.60 saw nominal trading amounts exceeding 1 billion Australian dollars. Previously, according to data from the US Commodity Futures Trading Commission, hedge funds increased their Australian dollar short positions to 37,708 contracts at the end of 2024, the most bearish level since March 2022. Con Davelis, Head of FX Options Trading at National Australia Bank in Sydney, stated, "With the Australian dollar hovering near the 2022 low against the US dollar, FX options trading activity has increased. The current market dynamics feel like the usual importer/exporter demand in FX options." Davelis added that if the Australian dollar falls below 0.6170, there may be increased demand from macro hedge funds, as it "opens the door for a larger move down." In March 2020, the currency pair fell to a low of 0.5510. Although the Australian dollar could potentially break below the 2022 low, the premium for hedging downside risks over the next three months (compared to upside risks) remains much lower than in August or October. Mayank Navalakha, Head of FX Options Trading at ANZ Bank, stated, "There has been a lot of volatility in the market, often related to hedging in the Australian dollar/US dollar, leading to a compression in the risk reversal curve from the highs in late December." He also noted that demand for downside options is significantly lower compared to other G10 currencies such as the British pound and euro. On Thursday, the pound against the US dollar fell to its lowest level since November 2023. However, the Australian dollar is facing increasing pressure on multiple fronts. A decline in a key inflation indicator has led traders to believe that the Reserve Bank of Australia is more likely to cut rates next month; below-expected retail sales data on Thursday increased the likelihood of a rate cut; concerns about further US tariffs under President-elect Trump's leadership continue. The US employment data to be released later on Friday could further exacerbate bearish sentiment, as strong data could push up US Treasury yields, support the US dollar, and weaken the Australian dollar. Strategists at Macquarie Bank in Singapore stated that a fall in the Australian dollar against the US dollar to 0.60 is possible. They stated that factors such as a decline in the US stock market due to concerns about global trade wars, the need for rapid rate cuts by the RBA to support the economy, among others, could lead to this scenario.