There is an old saying that traders have which goes something along the lines of that when everyone is on a position there is only one way the market can go – the other way.
Such was the case in Sterling above 1.70 and Euro at 1.38-40 and these two currencies are now down below 1.61 and 1.29 against the US dollar respectively.
Right now we might be seeing a similar situation with the Aussie dollar which has been universally loved by all because of the strong yield pick up available by simply owning it, the flip-side of which means it costs a lot to short (sell).
So far, over the past few days, the Aussie has pulled back from 94 cents to sit at 0.9250 this afternoon and closing in both on the bottom of the six month range and its weakest close since May 2014.
Measuring for “crowdedness of trades” in Forex markets is really difficult because of the OTC (over-the-counter) nature of the markets and the large number of players. What many do, myself included, is use positioning of futures traders who buy and sell currencies on the IMM exchange (an observable market and positioning even though a small percentage of total forex volume) in Chicago. This data is then reported by the Commodity Futures Trading Commission (CFTC) each Friday afternoon Chicago time.
What we see when we look at the Aussie dollar is that Aussie dollar traders are as long, own as many Aussie dollars, as they have at almost any time in the past 52 weeks and are a very long way from the average holding.
This is the very definition of a crowded trade.
Now of course it doesn’t mean the Aussie dollar is bound to fall but it simply highlights the risk that when it comes to traders and Aussie dollar punters – and the positions they are willing to take – they are largely ‘full’ of Aussie.
This means that if, and it’s an if, 92 cents gives way the Aussie dollar could fall quite some way regardless of fundamentals which suggest it is around fair value at the moment.
Clearly the Aussie is still within that range and nothing terribly much is going to happen unless it falls down and through 92 cents. But as a long term currency traders it is increasingly looking like the RBA is going to get its long held desire for a lower Aussie into the mid 80 cent region.
Disclaimer: Greg McKenna is eating his cooking on this one and has a tiny Aussie dollar short position he has been carrying for some time now.