(Bloomberg) -- Hedge funds have little doubt that the Australian dollar is headed lower. The nation’s biggest banks beg to differ.

Speculative wagers against the Aussie are hovering near a two-year high, reflecting concerns about the currency’s sensitivity to China’s slowdown and tensions in the Middle East. Australia’s near one percentage point interest-rate gap with the US has also emboldened short sellers.

But strategists at all four of Australia’s biggest banks say the bearish bets may backfire as a lot of the bad news is already in the price. In addition, the Reserve Bank of Australia will probably maintain its hawkish stance and China’s outlook is already on the mend, according to Westpac Banking Corp. and Commonwealth Bank of Australia.

The divergence in views underscores the difficulty in predicting the Aussie’s path after the currency bounced back from a 4% loss in the first quarter to outperform its Group-of-10 peers since end-March. Much of the currency’s fortunes rests on the timeline for policy easing in the world’s largest economy — an event that has been repeatedly pushed back as price pressures persist.

“The size of the short position is telling us that many are pushing the Aussie down and yet it doesn’t want to go down, suggesting quite a lot of the bad news is in the price already,” said Rodrigo Catril, strategist at National Australia Bank Ltd., who sees the currency advancing to 69 US cents this year and 75 by end-2025. Unless there’s a large risk-off event, “there could be a lot of pain ahead for those betting on the Aussie to fall.”

As one of the world’s most actively traded currencies, the Aussie is known for its volatility and sensitivity to economic cycles and geopolitical risks. It was trading at around 67 US cents early Thursday, having weakened against the greenback, pound, euro and Danish krone this year. 

The most bullish forecasters see the Aussie strengthening to around 73 US cents by year-end and 75 US cents in early 2025, data compiled by Bloomberg show. 

Rate Bets

There are reasons to be more optimistic on the Aussie, strategists say. 

Westpac and AMP Ltd. predict the RBA will maintain its hawkish stance, despite the government’s latest forecast for consumer prices to fall back within the central bank’s targeted range later this year.

Australia’s inflation came in faster than expected in the first quarter, bolstering the case for the RBA to keep rates elevated until next year. Based on current estimates, that would put the central bank behind its US and European peers in cutting rates. 

“Unless you think Australia and US monetary policy are going to diverge further — the RBA cuts, Fed hikes — I don’t think there’s huge value shorting the Aussie,” said Sally Auld, chief investment officer at JBWere Ltd.

China Effect

Improving investor sentiment toward China, as witnessed in the country’s recent stock rally, may also be a tailwind.

While the east Asian powerhouse’s economic recovery remains patchy for now, there are signs that Beijing is ramping up efforts to meet its ambitious growth goal of around 5% this year. A 1 trillion yuan ($138 billion) special sovereign bond sale will kick off on Friday, with policymakers also contemplating a plan to mobilize local governments to alleviate a housing crisis. 

In the meantime, although a declining yuan has weighed on the Aussie, Beijing’s tight grip on its currency means the downside may be limited. After months of selling pressure, strategists now forecast a relatively more benign trading environment for the yuan as higher US rates appear largely priced in.

“We expect the global and Chinese economic outlook to improve” and central banks to ease policy and support measures from Beijing to come through, said Carol Kong, strategist at Commonwealth Bank of Australia. For now, the short bets “look stretched, which raises the risk of a big reversal if speculators unwind their positions,” she added.

To be sure, the Aussie’s path higher may not be a straight line. A sudden escalation in Middle East tensions or a global recession remains a risk, as well as any renewed slump in the Chinese economy. 

Still, for Australia & New Zealand Banking Group Ltd.’s Mahjabeen Zaman, the Aussie’s downside for now appears “quite limited.” 

“Market positioning is really bearish, but I think that points to some room for reversal,” said the head of FX research at ANZ. The currency may strengthen to 69 US cents this year, she said. 

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