The Australian dollar is on the nose with currency traders

Lars Baron/Getty ImagesSINGAPORE – SEPTEMBER 13: Daniel Ricciardo of Australia and Red Bull Racing and Max Verstappen of Netherlands and Red Bull Racing attempt to open a durian.
  • Currency speculators are extremely pessimistic on the outlook for the Aussie dollar.
  • Net short positioning among leveraged investors is near the highest level since mid-2015.
  • With pessimism towards the Aussie elevated, and markets positioned for further weakness, further declines may be hard won.

The Australian dollar is on the nose with currency traders, according to the latest Commitment of Traders (CoT) report released by the US Commodity Futures Trading Commission (CFTC) on Friday.

At the close of business last Tuesday, net short positioning in the Aussie dollar via options and futures contracts held by currency speculators totaled US$5.9 billion, nearing the highest levels on record.

Net short positioning among asset managers, typically institutional investors such as pension funds, insurance companies, mutual funds and investment managers, did hit the highest level on record, lifting by $US100 million to $US3.5 billion over the week.

ANZ Bank

Net Aussie dollar shorts held by leveraged funds such as hedge funds and commodity trading accounts also increased by $US100 million from a week earlier, moving back towards the multi-year highs seen earlier this year.

ANZ Bank

Reflecting the continued build in bearish bets, the AUD/USD fell to the lowest level since February 2016 prior to the CFTC cutoff date last Tuesday.

The increase in short positions held by both cohorts coincided with continued buying in the US dollar with leveraged funds and asset mangers lifting net long positions in the greenback by $US900 million and $US1.6 billion respectively from seven days earlier.

While the data presented by the CFTC does not capture total FX positioning among speculators, it does provide a few clues as to what traders think will occur in the period ahead.

Right now, it’s clear they think the Aussie dollar is going lower, and likely to add to the large losses seen against the greenback and in trade-weighted terms since the end of January this year.

Given the backdrop of ever-widening interest rate differentials between Australia and the US and continued concern surrounding the outlook for emerging markets, especially China, it’s understandable why pessimism towards the Aussie dollar is so elevated at present.

However, with markets already positioned for further weakness, there is a risk that any improvement in the macro backdrop could spark buying in the Aussie, a move that could prove to be quite pronounced given it could see traders cut or reverse their bearish bets, particularly among those late to join the move.

We’re certainly not at that point yet, but as was seen in the latter parts of last week, the Aussie dollar failed to break to fresh lows despite widespread and large losses in stock markets around the world, indicating a sharp deterioration in investor risk sentiment.

That suggests short positioning may be approaching or at saturation point in the Aussie, at least for the moment, meaning further declines may be hard won in the absence of any additional “bad” news.

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