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By Russell Glaser

The Australian dollar has been one of the worst performing currencies this week as reduced risk sentiment weighs on the currency. The fact that AUD market positioning continues to increase stands out in this “risk off” trading environment.

With market speculation running wild of a potential Greek default and French banks coming under funding pressures, risk sentiment has plummeted as traders move into safe haven assets such as the USD and US Treasuries. The AUD is considered a high beta currency and has been sent sharply lower over the past few days. Versus the USD the AUD is down 2.1% this week alone and has shed 5.2% since its September 1st high. The AUD is also down sharply in the crosses with the AUD/NZD falling 1.1 % this week and the AUD/JPY down 3.1% as well.

Data released on Monday showed the Australian trade surplus declined to AUD 1.826 bn while the June surplus was revised lower to 1.82 bn from 2.05 bn. The declines in the trade balance point to weaker future growth. Data released today showed Q2 housing starts declined -4.7% and underlines the slowing housing sector. Risks of a hard landing in China have also weighed on the AUD as over 21% of its Australian exports go to China, though positive new loan data and lower than expected CPI have reduced risks for a sharp decline in Chinese growth.

At its last meeting the RBA highlighted of the increasing risks to the European and US economies but maintained its hawkish tone as inflation remains elevated at 3.6% and economic growth continues to increase due to higher commodity prices. However, it is unlikely for the RBA to continue its current rate hiking cycle given the western economies may be standing on the edge of a cliff.

What stands out is the rising long position in the market for Australian dollar futures. The most recent CFCT Commitment of Traders report shows speculators have added to their long AUD positioning despite reduced market sentiment stemming from Europe. It will be interesting to see if this trend continues in this Friday’s report.

The technical picture is also looking bleak. After breaking its long term trend line from Q2 2010 the AUD/USD failed to make a significant move back above the trend line in early September. Often a currency pair will break below a trend line only to rise back to the previously broken trend lines which will then serve as a resistance level. A move below the support of 1.0315 has opened the door to 0.9925 at the August low/38% Fib retracement from the 2010-2011 up trend. Below that rests the March low of 0.9700. The AUD/NZD head and shoulders pattern failed to complete itself and likely caught AUD bulls long, triggering stops on the way down. The next support level for the AUD/NZD rests at the August low of 1.2625.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.