If you have to put a list together of the top five drivers of forex rates around the world one of the them would have to be market positioning.
That’s because with the increasing financialisation of any product or set which can be freely traded it’s what traders do and what traders think as opposed to what might be called “fundamentals” that drive price action.
Fundamentals are still important because they drive what traders and investors are often thinking. But’s it’s how those thoughts are then reflected in the trades which often becomes as much of a driver of price action as anything else.
News today from the ANZ that speculative Forex traders have been savagely paring their long US dollar exposures over the past six weeks is exactly the type of information that explains why the Euro, and to a lesser extent the Aussie dollar, came under heavy selling pressure in the wake of Janet Yellen’s reiteration that rates in the US are still likely to rise this year.
According to the ANZ, what that means is:
The stronger than expected rise in US core inflation coupled with FOMC Chair Yellen’s reaffirmation that if the economy evolves as expected, “it will be appropriate at some point this year to take the initial step to raise the federal funds rate” is likely to lead to a reinstitution of USD longs.
The NAB’s currency strategy team agrees. Writing in a note to clients Monday they said, “After a 7% decline off multi-year highs the ‘Big Dollar’ (USD) appears to be building a base.”
That’s code for it’s headed higher. Which means, according to Elias Haddad, senior currency strategist at CBA, more Aussie dollar selling.
“The AUDUSD will be under downward pressure from a firming USD and commodity price developments,” he said in a note to clients Monday.
He’s not super bearish but believes the Aussie dollar is tracking back to 75 cents in the months ahead.