Currency traders are falling over each other to buy the Australian dollar, lifting their net long positioning to the highest level since April 2013, according to data released by the US Commodity Futures Trading Commission (CFTC) on Friday.
This chart from ANZ shows net speculative positioning in the Australian dollar against movements in the AUD/USD over the past five years.
Net speculative positioning, defined by ANZ 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 Aussie dollar.
While this data only captures changes in positioning reported by the CFTC, it can be used to extrapolate broader views held by currency traders during a specific period.
That means the market, collectively, hasn’t been this bullish on the Aussie dollar in over four years.
Although higher commodity prices and firmer Australian economic data have contributed to recent buying interest, the main reason why the Aussie remains supported is continued weakness in the US dollar.
It’s struggling to find any traction, undermined by soft inflation data and heightened political uncertainty, leading to a scaling back of rate hike expectations from the US Federal Reserve in the period ahead.
According to ANZ, citing the CFTC data, traders sold the greenback again last week with net shot positioning increasing by $US1.1 billion to $US6.9 billion, leaving it near the highest level since early 2014.
Given the divergent views expressed by traders towards the Australian and US dollars, it’s little wonder why the AUD/USD currently sits near the highest levels in close to two years.
However, with so much good news already priced into the Aussie, and with so much bad news factored in for the greenback, current stretched positioning continues to point to the risk of a sharp and sudden reversal in the AUD/USD should sentiment towards one or both currencies start to change.
We’re not at that point yet, but it’s a clear and building risk.