FX traders are yanking their bearish Australian dollar bets, and it's helping to propel the currency higher

Photo by Luis Davilla/Cover/Getty Images

On the back of a weak US non-farm payrolls report for September, something that saw expectations for monetary policy tightening in the US get pushed back even further, FX traders slashed their long US dollar positions according to last week’s CFTC positioning data.

Leveraged funds were net sellers of USD last week, reducing their net long USD positioning by $600 million to $17.0 billion,” said Khoon Goh, senior FX strategist from the ANZ in a research note released earlier today.

“Weaker US non-farm payrolls and a paring back of Fed rate hike expectations drove the dollar selling.”

The commitments of traders report released by the US commodity futures trading commission (CFTC) reveals current positioning from traders across a variety of asset types, including currencies. Net long positioning indicates that as a whole the investment community is betting on further gains in a particular asset. Conversely, net short positioning indicates that as a collective group, traders are betting on further declines in a particular asset.

Reflective of the price action seen in recent weeks, something that fits with the improved sentiment towards China, leveraged investors trimmed short positioning across commodity currencies, particularly the Australian dollar.

“Commodity currencies recorded net buying of $800 million,” said Goh.

“This was led by the AUD, which saw a reduction in overall net short positions to $1.9 billion from $2.5 billion. Positioning in NZD and CAD both improved by a more marginal $100 million. The recovery in commodity prices no doubt sparked the net buying in commodity currencies.”

The chart below reveals the reduction in Australian dollar short positioning seen in recent weeks. The data reflects positioning as of the close of trade on October 6, and points to the likelihood that short positioning was reduced further in the latter parts of last week given the AUD/USD closed the week at .7331, some 2.35% higher than where it closed on Tuesday.

Aided in part by continued short covering among leveraged investors, the Australian dollar has now rallied more than 6% from its September 29 low. At .7338, it is currently on track to log its ninth consecutive day of gains, something that will mark the longest streak of gains seen since March 2009.

Given overall Australian dollar positioning remains short, there may be further gains to come this week should domestic economic data top expectations and investor sentiment remain buoyant. Business and consumer sentiment data will be released on Tuesday and Wednesday respectively while on Thursday employment data for September is also scheduled for release.

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