Pessimism towards the Australian dollar is starting to lift

Tony Feder/Getty Images
  • The Australian dollar has rallied in recent weeks, lifting to the highest level against the greenback since late August on Friday.
  • Speculative short positioning in the Australian dollar has reduced quite sharply in recent months, according to data from the US CFTC.
  • The reduction in bearish bets suggests an increasing number of traders now feel the lows for the Australian dollar may now be in.

If recent tweaks to market positioning are anything to go by, pessimism towards the outlook for the Australian dollar is starting to lift.

As seen in the chart below from Sean Callow, Senior FX Strategist at Westpac Bank, net speculative short positioning in the Australian dollar fell to the lowest level since mid-July last week, according to data reported by the US Commodity Futures Trading Commission (CFTC) on Friday.

Westpac Bank

The CFTC data looks at the level of bullish and bearish futures and options positions held in a particular asset, in this case the Australian dollar.

Speculative positions are regarded as those held by investors who are looking to profit from fluctuations in the underlying asset price, rather than for hedging purposes.

The CFTC defines asset managers as “institutional investors, including pension funds, endowments, insurance companies, mutual funds and those portfolio/investment managers whose clients are predominantly institutional”.

Leveraged funds are typically hedge funds and other types of money managers.

Right now, positioning in both groups is still net short, meaning most continue to expect the Australian dollar will weaken further in the period ahead. However, short positioning is now significantly less than what was the case just a couple months ago.

The cutoff for the latest data was Tuesday last week, meaning it does not capture any tweaks to positioning since that date. During that period, there was mixed news on trade tensions between the United States and China, a big beat in Australian employment growth and renewed speculation on the probable schedule of rate increases from the US Federal Reserve ahead, helping to propel the AUD/USD to the highest level since late August on Friday.

The lift in the Aussie points to the likelihood that additional bearish bets against the Aussie have been pulled in recent days.

While the CFTC data does not capture all positioning, it does provide a fairly good indication as to what broader financial markets are thinking.

And right now, an increasing number are starting to think that recent pessimism was overblown, and that the lows for the Aussie may be in.

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