Traders think the Aussie dollar has further to fall

Lloyd Bishop / NBC / NBCU Photo Bank via Getty ImagesSelling rallies.
  • The Australian dollar has lost close to 9% against the greenback since late January.
  • US trade tensions and divergent monetary policy settings between the RBA and US Fed have contributed to the Aussie’s recent slide.
  • Speculative short positioning in the Aussie rose to the highest level since early 2016 last week, as the AUD/USD fell to 13-month lows.

The Australian dollar has been under pressure this year, losing close to 9% against the greenback since late January.

Divergent monetary policy settings between the Reserve Bank of Australia (RBA) and the US Federal Reserve, along with ongoing trade tensions between the United States and its other major trading partners, has weighed on the Aussie despite a solid bounce on Friday.

The AUD/USD tells the story so far this year of a fall from above 81 cents to as low as .7342 late last week.

Investing.comAUD/USD Daily Chart

Based on latest positioning data released by the US Commodity Futures Trading Commission (CFTC), it looks like leveraged funds are betting the Australian dollar has plenty of more downside to come.

Net short speculative positioning held by leveraged investors — typically hedge funds and various types of money managers including CTAs, registered commodity pool operators or unregistered funds — continued to lift last week, coinciding with the AUD/USD falling to the lowest level since May 2017.

Net speculative positioning, defined as non-commercial positions in the CFTC data, is the sum of long and short options and futures positions in a particular asset, in this case the Australian dollar.

A net short position indicates that leveraged funds, collectively, are looking for further weakness in the Aussie.

As seen in the chart below from ANZ Bank, while not at extreme levels, short positions held by leverage funds are now the highest level since early 2016. That was a period when fears over the Chinese economic implosion were in overdrive, something that, of course, didn’t play out on that occasion.

ANZ Bank

On this occasion, concerns over escalating trade tensions between the United States and its major trading partners, including China, are clearly weighing on the commodity and global growth-linked Aussie dollar.

Along with an ongoing expectation that the US Federal Reserve will continue to lift interest rates, even with uncertainty over trade, that has seen many leveraged investors ditch the Aussie in favour of the US dollar.

Indeed, according to the latest CFTC report, net long US dollar positioning among this group hit the highest level since May 2017 last week.

They’re bullish on the US dollar but pessimistic about the Aussie, in other words.

While speculative positioning held by leveraged investors is not stretched, or extreme, by any measure in the Aussie or greenback, some of the recent movements reflect a flight to safety as trade tensions continue to build.

Although an understandable reaction given the implications for global growth, if trade tensions were to subside it would likely see pessimism towards the Australian dollar lift quickly, potentially creating the risk of a large short-covering rally among traders.

We seem to be far from that point right now, but it is a risk that traders should be mindful of, particularly those who are recently short.

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