Soros’ billion dollar bet on Aussie rate cut pays off

Billion dollar bet on rate cut pays off

May 8, 2013 – 9:46AM

Mark Hawthorne

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It may go down as one of the great currency bets in Australian dollar history – a $US1 billion gamble on a Reserve Bank rate cut that has delivered a $US19 million ($18.65m) profit in 36 hours. The beneficiary, if you believe the rumour mill, is investment legend George Soros. Best of all, it appears the 82-year-old American pulled off the deal three times, all with different foreign exchange brokers in Asia, for a tidy profit of almost $US60 million.Not bad for a bloke who, just three weeks ago, was wrongly declared dead. Soros is a Hungarian-American business magnate, investor and philanthropist, who has built a reputation over the past 25 years of picking the impact of government decisions on currencies and commodities. Back in 1992, based on British government policy changes, Soros famously shorted the British pound, by using the German marks as his paired currency, earning a staggering $US1.8 billion profit for his fund. Black Wednesday – September 16, 1992 – is known as the day George Soros “broke” the Bank of England. The world of foreign exchange trading is a complex one. Unlike selling short a stock, an investor can opt to sell a currency at a future date without needing to physically borrow the currency. The investor simply enters into an agreement to buy or sell a currency for a predetermined price – a ‘‘short number’’ or a ‘‘long number’’ – on a specified future date. By contracting to sell one currency, an investor is also contracting to purchase another currency, as currencies trade in pairs. When he famously broke the Bank of England, Soros needed to use the German mark to do so.

The action this time started on Monday, when a major foreign exchange (FX) trader in Hong Kong took a $US1 billion placement order for the Australian dollar, a ‘‘short number’’ of $US1.0373 and a settlement time of 36 hours – just after the RBA announcement.

Those trades were placed via Hong Kong and Singapore, and were believed to be placed by Soros Fund Management.

The Australian dollar was trading at $US1.0320 on spot markets at the time, but fell on the back of bad jobs and retail data.

Brokers – whether they be trading stocks or forex – are talkers. Not long after the $US1 billion was placed, the Aussie dollar slipped from $US1.0284 to as low as $US1.0222 in offshore trade, amid unconfirmed rumours that Soros was planning a raid on the dollar ahead of yesterday’s interest rate announcement.

‘‘Someone … seems to be betting on a rate cut,” said one Sydney-based FX trader yesterday. “I’ve heard the George Soros rumour … a billion dollars sounds like a lot, but it’s not enough to move the Australian dollar and it’s not a lot for George Soros, but there is a play happening  in the FX market. If it is him, it’s probably a bet on a rate cut. These days a billion bucks can’t do much to the Aussie.’’

ANZ current strategist Andrew Salter also said he was aware of the rumour of a short position on the Australian dollar, adding that the “appropriate position to have in the Australian dollar is short given the outlook for world growth and the outlook for the Reserve Bank”.

The Aussie has, of course, been ripe for the picking.

Earlier this year, a HSBC global valuation found the Australian dollar was the most overvalued currency in the world, using data from from the OECD’s measure of purchasing power parity, The Economist’s Big Mac Index and the Current Real Effective Exchange Rate (REER) as compared to its five-year average.

The Organisation for Economic Co-operation and Development’s measure of purchasing power parity found the dollar was overvalued by 60 per cent.

Under the REER, the dollar was almost 12 per cent overvalued, while The Economist’s index found the current was overvalued by 12.2 per cent.

HSBC said in its report that currencies like the Australian dollar were facing headwinds given the so-called currency wars, which had seen countries such as the US and Japan use quantitative easing to lower their currencies’ value.

Soros sold out of gold investments late last year, sparking rumours that he would again be active in global currency markets. According to reports out of Japan, his investment company has made $US1 billion by shorting the yen between November 2012 and February this year.

It has all proved to be fairly prescient.

At 2.30pm yesterday, the RBA cut the cash rate by a quarter of a basis point. The Australian dollar plunged immediately to $1.0178 – giving the mystery currency gambler out of Hong Kong a margin of nearly 2 US cents on every dollar.

The profit, notched up in just 36 hours, topped $US19 million.

But it looks like the person behind it managed to pull off the deal three times.

‘‘I’ve heard the $US1 billion in Hong Kong was just one order. It was also done out of Singapore and a third foreign broker.’’

If it was Soros, then May has proved to be a better month than April – when news agency Reuters prematurely declared him dead, and accidentally published his obituary.

The Australian Dollar Chart That Has The World Scratching Its Head

Joe Weisenthal | 30 minutes ago | 880 | 3

There’s a rumor buzzing around Australian media that George Soros has made a killing in recent days shorting the Australian Dollar.

There doesn’t seem to be much to it, other than that someone placed some big anti-Aussie bets at some big brokerages, and the currency fell yesterday after the Reserve Bank of Australia cut interest rates.

But the rate decision aside, people have been negative on the Australian dollar for awhile now.

The reason? China is slowing and the commodity business is booming, and that should be bad news for the Australian dollar which is tied tightly to both of those things.

Michael McDonough of Bloomberg Briefs tweeted out this picture showing the Aussie dollar vs. the RBA Commodity Price Index. While the commodity price index has weakened considerably, the Aussie remains strong.

Anyway, the strength of the Aussie dollar was enough to get the attention of the Reserve Bank of Australia itself, which said in its latest statement:

“the exchange rate has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time”

In a note today, Citi‘s Steven Englander answered the question of why the Australian dollar is hanging on so well. Basically, commodities are only partly the story. Other aspects include the Chinese currency itself (which has been strengthening) and volatility (which has been low). Low volatility is usually associated with a “risk on” mode, so basically although commodities are slumping, the general mood is bullish, and that’s historically good for the currency.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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