Aussie Dollar May Drop as MSCI Losses Roil Hedges: Chart of Day

By Candice Zachariahs

Oct. 30 (Bloomberg) -- Australian investment funds, the world's fourth-biggest money managers, may have to dump their own currency as they adjust foreign-exchange hedges at the end of the month on holdings equal to a quarter of the nation's economy.

The CHART OF THE DAY compares the monthly performance of the Australian dollar with the MSCI World index and a volatility gauge based on trading in foreign-exchange options.

The MSCI World's 21.6 percent drop since Sept. 30 may lead to a rush to sell Australian dollars, said Richard Grace, chief currency strategist at Commonwealth Bank of Australia in Sydney. Because the value of their overseas assets has fallen faster than the currency's 15.4 percent slide, local managers need to cut positions in Australian dollars used as currency hedges, he said.

``Large monthly declines in the MSCI World index have usually been associated with large declines in the value of Australian offshore assets and large falls in the Australian dollar,'' Grace said. ``Liquidity is still very thin, so the moves could be quite large.''

Australian funds held some A$252 billion ($161 billion) abroad as of June 30, equal to a quarter of the nation's gross domestic product, according to Grace. The value of offshore equity portfolios has fallen as the MSCI World index heads for its biggest monthly loss since at least 1970.

The Australian dollar traded at 67.07 U.S. cents as of 10:23 a.m. in Sydney, a 32 percent plunge from the record high of 98.49 U.S. cents reached July 16. Australian-U.S. dollar volatility surged to touch 44.5 on Oct. 27, the highest since at least 1995, after averaging 9.6 in July.

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net