Foreign exchange investors are increasingly betting that Australia’s unprecedented bushfires will hurt the country’s economy and some are short-selling the Australian dollar in anticipation it will fall.
On top of a damage bill likely to run to billions, analysts expect that consumer sentiment, retail spending and tourism, which account for more than 3% of the economy, will all take a hit.
That has in turn spurred bets that the crisis could push the Reserve Bank 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 in a note to clients on Thursday, targeting a fall to US$0.6728. The Aussie dollar 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.
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% 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 4 February. The implied probability is shy of even, but has climbed from about a third in December to a little over 40%.
“[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 $700m, according to estimates from the Insurance Council of Australia.
Moody’s Analytics said the total cost of the fires, which have destroyed more than 10m hectares of land, could easily surpass that of deadly 2009 blazes that burned 450,000 hectares and cost an estimated $4.4bn.