The high-flying Australian dollar has hit an air pocket in recent weeks, seeing it give back some of the gains achieved earlier in the year.
After rallying more than 12% against the US dollar, the Aussie has now fallen over 4% since mid-September, dragged lower by a combination of renewed US dollar strength, weakness in base and bulk commodity prices and, more recently, renewed doubts over the likelihood that the Reserve Bank of Australia (RBA) will begin to lift interest rates in the first half of next year.
However, despite the recent price action, one thing remains the same.
Traders, collectively, still think that there’s brighter days ahead for the Aussie.
Nothing quite underlines that point than the chart below from ANZ.
It shows net long speculative Australian dollar positioning according to data released by the US Commodity Futures Trading Commission (CFTC) last Friday.
Net speculative positioning, defined as non-commercial positions reported by the CFTC, is simply the sum of long and short options and futures positions in a particular asset, in this case the Australian dollar.
A net long position indicates that traders, collectively, are looking for further gains.
While it only captures positioning reported by the CFTC, the data can be used to extrapolate broader views held by currency traders.
And what the latest CFTC data points to is that traders, despite the apparent risks and recent iffy price action, remain as bullish as they have been for several years when it comes to the outlook for the Aussie.
Indeed, net long positioning currently sits at levels that were last seen in mid-2013 when the Aussie was trading above parity to the greenback.
A slightly ominous statistic given the Aussie’s performance in subsequent years, even with its recent strength.
While past performance is not indicative of future returns, it does offer a timely warning that siding with the majority does not necessarily mean that view will come to fruition, particularly when positioning is stretched so far in one direction.
The recent build up in speculative longs suggests that a lot of good news, such as the prospect of RBA interest rate hikes, stronger global economic growth and firmer commodity prices, is already largely priced in by markets.
It also hints that fewer interest rate increases from the US Federal Reserve, or the inability of Donald trump to deliver taxation reform, is also baked into current market pricing.
Should any of those, or all, not come to fruition as the markets currently expect, lopsided long positioning in the Aussie makes it vulnerable to a sharp and sudden pullback should traders start to unwind their bullish bets.
That’s not to say that the Aussie doesn’t have a lot of good things going for it at present — it does.
However, with so much good news already factored in, one must question as to how much further the Aussie can rally, and how much it could potentially fall, given current bullish sentiment and positioning.
That, of course, comes down to your own individual view.