Sunday, August 4, 2013

Short Australian dollar is becoming a crowded trade

The Australian dollar remains under pressure, approaching the lows not seen in nearly three years.

AUD/USD (source:

The key fundamental reason of course remains China's ongoing economic slowdown. Other fundamentals include:

1. Recent increases in US interest rates (and the risk of rates going even higher).
2. Weak global commodity prices (see discussion).
3. Weak Brazilian real (see discussion), as Brazil remains one of Australia's key competitors for natural resources exports.
4. Australia's producer prices remain subdued, giving the RBA plenty of room to lower rates to historically low levels (see discussion from October of 2012).

5. As a result, Australia's short-term rates have declined sharply.

Australia's 1-year government bond yield (source:

6. Australian government budget deficit for 2013/14 is now forecast to be AUD 30bn rather than the AUD 18bn predicted earlier.

But fundamentals aside, the short AUD position is becoming a crowded trade, as everyone jumps on the "short Australia as a proxy to China" bandwagon. The Goldman positioning index (based on the CFTC futures data) shows a record buildup in net short speculative positions.

Source: GS

This tells us that this trade, while correct fundamentally, is vulnerable to sharp upside corrections. The unwind of the short AUD positions could get ugly.
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