Aussie Dollar – Moonshot Or Moonshine?

The unswerving advance of the pacific peso continues to stretch the friendship. Hitting new highs daily – even as the technicals continue to deteriorate.

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Photo: Rohan Clarke

Open interest on the CME also suggests that hedge funds and the like have been jumping onto the long commodities / short USD view once more – the market is overweight this trade and increasingly exposed to a reversal in flows.

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Photo: Rohan Clarke

In this context, it’s notable that the futures market is also showing signs of exhaustion as the Money Flow Index – that combines RSI with volume – continues to mark out a series of lower highs/lower lows, even as the exchange rate has pushed on higher.

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Photo: Rohan Clarke

It is hard to believe that sentiment to the USD can get any worse – derision of US monetary policy is only matched by doubts about the sustainability of the budget deficit. The Calafia Beach Pundit (here) noted that the USD is trading at record lows both in nominal and real terms:

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Photo: Rohan Clarke

In an AUDUSD context, this extreme in sentiment can be seen in the gap between the 20 period moving average and the monthly close in the AUDUSD.

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Photo: Rohan Clarke

Of course there are always two ways that this gap can close – the moving average catches up over time or the monthly price falls back into line. My sense is that with fundamentals likely to deteriorate, the odds are with mean reversion.

 

Conclusion

Given that a reasonable downside target for AUDUSD remains around 0.90, there is plenty of scope for patience. With half the short on at ~1.01, we’ll be looking for signs that the current thrust higher has run its course before adding materially to the position.

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