Interest rate hikes may not save the bulls either? Australian dollar's highest bullish position in eight years hit by gold price's sudden drop "targeted detonation"

Under the double pressure of the unexpected restart of the interest rate hike cycle by the Reserve Bank of Australia and significant fluctuations in the global commodity market, hedge funds that previously had a large long position on the Australian dollar are now caught in a complex game. The Reserve Bank of Australia recently announced an increase in the official cash rate by 25 basis points to 3.85%, breaking a two-year period of policy observation and aiming to address persistent inflation pressures. However, the Australian dollar, which should have strengthened due to narrowing interest rate differentials, quickly encountered resistance after reaching nearly a three-year high. The main reason for this is the drastic volatility in the global precious metals market, with gold and silver prices dropping significantly from historical highs, directly weakening the logic for the Australian dollar as a typical commodity currency to rise. The consequences of this logic reversal are becoming evident: the decline in precious metal prices not only offset the optimistic sentiment brought by expectations of rate hikes but also pushed the Australian dollar into a more severe downward trend. The currency has fallen from the near three-year high it reached last week, leading to market doubts about whether hedge funds have misjudged the situation - the size of their long position on the Australian dollar has now climbed to the highest level since December 2017. It is worth noting that last month, the Australian dollar surged 4.4% under the dual boost of the Reserve Bank of Australia tightening policy expectations and a significant rise in gold and silver prices, providing a reasonable basis for hedge funds' optimistic stance. However, now, the same institutions are facing the double pressure of policy shifts and a bear market in commodities, putting their strategic effectiveness to an unprecedented test. "This is an old story - given the hawkish stance of the Reserve Bank of Australia, can speculators bet on the right side, or in other words, bet on the Australian dollar?" said Wu Mingze, a currency trader at Singapore StoneX. "The Australian dollar does have many positive factors, but the question is whether the volatility in the precious metals market will eventually overwhelm the bulls." Linked closely to commodity prices, the Australian dollar briefly climbed to 70.94 cents on January 29, reaching its highest level since February 2023, but quickly retreated. This adjustment came as international gold prices plummeted nearly 12% from historical highs - with the day gold peaked coinciding with the day the Australian dollar peaked. During the New York session on Thursday, the Australian dollar fell further, dropping by 1% to 69.27 cents. The direct trigger for this round of selling was a cooling signal in the US labor market, causing funds to accelerate their withdrawal from commodities and risk assets, once again confirming the sensitivity of the Australian dollar as a typical commodity currency to the trend of precious metals. Nevertheless, the Australian dollar still has many supporters, including asset management companies like PIMCO and institutions like Industrial Bank of France. Options traders had already increased their long positions before the Reserve Bank of Australia raised interest rates on Tuesday. "At the beginning of the year, the Australian dollar experienced a perfect storm: soaring prices of precious metals and base metals, a weak US dollar, a strong stock market, and the cherry on top was the Reserve Bank of Australia," said Sean Carroll, senior analyst at Sydney ITC. "But if precious metals experience a significant pullback and prolonged weakness, the Australian dollar will have a hard time standing alone. I believe that by June, the risk is that hedge funds have already taken profits and moved elsewhere." From a macro view, the future trend of the Australian dollar will depend on the resilience of domestic economic growth and the balance of the external financial environment. Although the interest rate advantage has shifted towards Australia, the Reserve Bank has lowered its economic growth forecasts for the next year, indicating a potential negative impact of a high interest rate environment on the real economy. At the same time, international investors are closely monitoring potential changes in US monetary policy, as any unexpectedly hawkish signals could offset the dividends from the Reserve Bank of Australia's interest rate hikes. For hedge funds, this is not just a decision about the direction of exchange rates, but also an extreme stress test between the benefits of monetary policy and the systemic risks in the commodity market.