Traders Return To The Australian Dollar

Summary

Speculative net longs are on the rise again for the Australian dollar.

The Australian dollar has made gains over most major currencies over the past three weeks except the U.S. dollar.

No immediate catalysts for the rise are evident - from iron ore to the Reserve Bank of Australia - but technicals favored the 2-day bounce against the U.S. dollar.

Three weeks ago, I was clearly premature in declaring an "ominous sentiment shift" in the Australian dollar (NYSEARCA:FXA). Since then, speculators have buckled down and returned to growing net long positions in the commodity-dependent currency.

Since nearly going to zero in late September, net speculative longs on the Australian dollar have steadily marched higher.

Source: Oanda's CFTC Commitment of Traders

While traders have returned to the Australian dollar over the past three weeks, the currency did fall against the U.S. dollar until it found support at its 200-day moving average (DMA).

The pullback in AUD/USD only ended with 200DMA support.

Source: FreeStockCharts.com

The Australian dollar has fared much better against other major currencies. It is flat against the Canadian dollar (NYSEARCA:FXC) but higher against others. Most convincing has been the rally against the Japanese yen (NYSEARCA:FXY). AUD/JPY trades at a three-month high and now faces a test of resistance at its declining 200DMA trend line.

The Australian dollar's rally against the Japanese yen now faces a critical test of resistance at its declining 200DMA.

Iron ore prices do not quite explain the Australian dollar's resilience and resurgence. Over the past month, iron ore has gone nowhere and is well off the high that marked the last rally. Perhaps traders are relieved the drop from the last peak has abated. Iron ore remains well off the spectacular run-up to the April high.

A new trick from iron ore: essentially flat-line prices for the past month.

Source: Business Insider

There was also nothing from the Reserve Bank of Australia (NYSE:RBA) in its October pronouncement on monetary policy that provided a catalyst…unless traders are guessing that the RBA is finally finished cutting rates for the foreseeable future. The statement contained little new information beyond an expanded review of a national housing market that overall look healthier:

"Supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. Growth in lending for housing has slowed over the past year. Turnover in the housing market has declined. The rate of increase in housing prices is lower than it was a year ago, although some markets have strengthened recently. Considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in rents is the slowest for some decades."

With the job market looking pretty good - "the forward-looking indicators point to continued expansion in employment in the near term" - there is indeed little reason to expect the RBA to cut rates again anytime soon.

Whatever the reason for the return of speculative longs, the Australian dollar has become a handy currency for me to use to hedge on other plays. In particular, GBP/AUD has sunk like a stone for the past month.

GBP/AUD has traded downward for nearly an entire month after September's high had the appearance of a change in directional bias.

The weekly chart shows GBP/AUD has now completed a roundtrip from the big 2013 breakout.

Be careful out there!

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In forex, I am net short the Australian dollar