The Australian dollar is going nuts

Wallabies player Michael Hooper in action during match against Wales in 2013. Stu Forster/ Getty

The Australian dollar has been going vertical for the past four hours in Asia today as the reversal of fortune for the US dollar, which began early this morning, continues and traders react to a break in the Aussies down’trend.

What’s behind the US dollar selling is difficult to pinpoint. Stocks in Asia and stock futures in the US are doing well while oil is back above $41. More likely than not this is a classic case of the old trader axiom, “buy the rumour, sell the fact” after the FOMC minutes all but guaranteed the Fed will hike at its next meeting in mid-December.

Indeed the rally has now taken the Aussie up by around 100 points off last night’s low.

AUDUSD 1 hour Chart (MT$, AxiTrader)

Of course with the Euro back above 1.07 and Sterling closing in on 1.53 and the Kiwi up more than 1% to 0.6526, traders will be getting a sense that everything is already priced into the US dollar. That is, as New York Fed boss Bill Dudley said in an interview overnight, this is the best telegraphed Fed move of all time.

It’s exactly the point the global fund manager survey from Merrill Lynch made about the US dollar long trade being seriously overcrowded. Indeed the analysts at BoAML doubled down calling it a ‘pain trade’ and noting that:

The most vulnerable tactical trade heading into Dec Fed hike is “long dollar”, and associated positioning, i.e. long discretionary, eurozone, banks, Japan, and short EM, resources, commodities

Which is why the break of the recent downtrend for the Australian dollar is potentially so important in driving trader preferences to be either cut short positions or perhaps, for the very brave, go long Aussie.

AUDUSD 1 day Chart (MT$, AxiTrader)

Short Aussie, along with short commodities, has been the global investor power play for the past two years. There are still a myriad of calls for it to fall into the 60-65 region in 2016.

So on balance most traders and investors are likely to be nonplussed by today’s move – 0.7150/60 is hardly strong, but the question that might arise in their minds if the Aussie goes much further is if the short AUD trade might be a pain trade too.

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