Data Diary

Australian dollar – large traders still reducing longs

Posted on 30 November 2010

The weekly Commitment of Traders report released overnight in the US (here) notes that large traders continue to sell down the Aussie dollar:

We’ve been tracking futures flows to see whether these ‘large traders’ (read ‘hedge funds’) lead market direction. In that context, we first noted that these traders were selling the AUD in October. The currency subsequently poked its head above parity.  You could be justified in taking the view that it’s a clumsy indicator then. But let me argue the case for the defense.

The Australian dollar is a pretty darn liquid currency, particularly given the relative size of the Australian economy. But that doesn’t mean large orders can’t move the market. In some senses, it is the success of the currency in attracting flows over and above trade and longer term investment requirements that leads it to be exposed to shifts in sentiment – the risk on/risk off flip and flop. So if hedge funds are net long the AUD, how are they to exit this position if not by ‘selling into strength’?  The view that this kind of selling has in fact been occurring is corroborated by the simultaneous fall in the open interest in the futures contracts.

So when Dennis Gartman says his three favourite trades for 2011 are 1) long gold 2) short EUR and 3) long AUD (see here) – it is worth remembering that he has deep pockets and can ride some big figure volatility in the mean time. For the rest of us, it may pay to heed the actions of the big funds rather than the words – as it looks like a better buying opportunity awaits. (Postscript – note that Gartman has been long AUD since early 2009 – see our post from April last year here.  It’s been a good call, but I guess he has wiggle room on the current pullback.)