Why the rebound in the Australian dollar may continue for some time yet, in one chart

Paul Kane/Getty Images
  • The Australian dollar has rallied in recent days, logging the largest gain in over a year on Friday.
  • Net short speculative positioning in the Australian dollar, according to data from the CFTC, is currently the highest that it’s been in over three years.
  • Should investor risk appetite continue to improve, it could lead to further gains in the Aussie on the back of short-covering from traders.

The Australian dollar has been on a tear in recent days, rallying by more than a cent against the greenback.

At .7350, the AUD/USD has now rallied more than 2% from the multi-year low of .7200 struck earlier this month.

Much of the rebound has been driven by an improvement in investor risk appetite, as well as modest reversal in the US dollar index.

Based on the chart below from Westpac Bank, the Aussie’s recent rebound could extend significantly in the period ahead should recent trends be maintained.

Westpac Bank

Using data from the US Commodity Futures Trading Commission (CFTC), it shows net speculative positioning in the Aussie dollar held by asset managers and leveraged funds.

As things currently stand, net positioning in futures and options is short among both cohorts, indicating that speculators are expecting further weakness in the Aussie in the period ahead.

Total net short positioning is now the highest it’s been since the middle of 2015, making shorts, particularly those initiated recently, vulnerable should the Aussie continue to push higher.

If that does occur — and it’s no certainty that it will — it could prompt investors who are short to reduce, neutralise of even reverse their trades, a scenario that could prompt further gains in the period ahead, especially should risk appetite continue to improve.

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