Just days before the most bone-jarring market move since Brexit, FX traders were piling into higher-yielding currencies

Photo by Mike Heydon/Jet Productions NZ Limited via Getty Images

Just days before the most bone-jarring move for risk assets since the UK Brexit vote, FX traders were piling into the Australian and New Zealand dollars with gusto.

That’s just one finding from the latest Commitment of Traders (COT) report released by the US Commodity Futures Trading Commission (CFTC) on Friday with net long positioning in the Aussie and Kiwi increasing by $US300 million and $US200 million respectively among leveraged investors last week.

According to ANZ’s Asia research team, headed by Khoon Goh, net long positioning in the Aussie now stands at $US2.7 billion. That for the Kiwi ballooned to $US2.2 billion, the highest level seen since April 2013.

Net positioning is simply the sum of long positions less short positions held among leverage investors. The CFTC figures were based off reported positioning as at the close of business on Tuesday, September 6.

ANZ looks at positioning among leverage investors as it is “commonly seen as a proxy for speculative positioning as they seek to profit from movements in the asset price as opposed to hedging business activities”.

In other words, it could be used to extrapolate broader market views on where investors believe a currency is heading.

Here’s current speculative positioning in the Australian dollar based of CFTC data, overlaid against movements in the AUD/USD:

And here’s the same chart, only for the New Zealand dollar against the NZD/USD:

Who said that Kiwis can’t fly? Traders seemingly think the currency will based on current positioning.

Writing on Twitter on Monday, ANZ stated that the NZD is “vulnerable” if leverage funds unwind this positioning. Though not to the scale seen in the Kiwi, you could easily argue the same case for the Aussie.

Both have benefited from a lack of recent market volatility, encouraging traders to bet on continued strength due their yield advantage over other major currencies and recent strength in commodity prices.

Whether these vulnerabilities translate to further selling in the short-term will be dictated by sentiment towards the likelihood of a US rate hike this year, particularly at the Fed’s upcoming September 20-21 FOMC meeting.

We’ll hear from several Federal Reserve officials on Monday, the last occasion investors will receive official commentary before next week’s policy meeting.

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