Extreme Positioning in Australian Dollar: Substantial Downside Ahead?

by: Ophir Chador

Released each week by the CFTC, the Commitments of Traders (COT) report offers investors a bird's eye view as to which futures markets are overbought, which markets are oversold and those markets that fall somewhere in between. While there are a number of ways in which the data might be interpreted – there is no science to it – the utility of the data as an additional layer of analysis is beyond question. While COT reports are available for all markets that trade on the futures exchange, this discussion will focus specifically on currency, or FX, futures.

In the latest COT report, one FX futures contract stands above the rest as being unsustainably overbought: the Australian Dollar.

Australian Dollar (AUD):


According to the latest COT report, net longs among small and large speculative traders in the Australian dollar outnumber net shorts by 102,988 contracts. Among large traders, the ratio of long to short contracts has reached a factor of nearly 12 to 1 – a notable increase over the better-than 8 to 1 ratio of the preceding week. Meanwhile, open interest in AUD contracts remain at peak levels, rising ever so slightly over the previous week to 157,736 from 156,905.


Since first peaking in August, 2009, the AUD has failed on three separate attempts to make new breakaway highs against the US dollar – the 0.94 handle has proven a tough barrier for the AUD to breach. Presently in its fourth attempt at a breakout, the AUD reached a 5-month high of 93.90 last Monday, only to retreat to the 92.50 mark by Friday's close.

The data concerning AUD open interest in the latest COT report is particularly significant to our anlaysis. While the net long AUD position among large traders increased rather significantly – small trader positioning was basically unchanged – open interest was unaffected. We might, then, conclude that there is no one left to enter the market anew.

Based on that conclusion, existing position-holders will be left to trade among themselves and, in all likelihood, gradually reduce their positions. Considering the ratio of long to short positioning, the probability of long positions being reduced greatly exceeds the alternative – that is, if a reduction does, in fact, take place. Thus, reduced positioning in the AUD would likely result in downward pressure for the currency.

Meanwhile, a closer look at the ratio of long to short position holders already in the market reveals that little upside for the AUD remains. Among large traders, the 88,632 long contracts dwarf the 7,666 short contracts. In the unlikely event that all those shorts flip their positions, the AUD would be little affected. Indeed, the 0.94 barrier mentioned above would likely go untouched. Again considering the ratio of long to short positioning, the probability that longs flip their positions to shorts greatly exceeds the alternative. Once again, downward pressure on the AUD is the favored outcome.


The Australian dollar has likely peaked at present levels and may be facing a significant downward move, immediately.

Disclosure: Author is short AUD/USD