Timing is Everything: Aussie Squeezes Shorts

by on February 5, 2014 4:21 am BST

The Australian dollar accumulated a record amount of shorts going into the Reserve Bank of Australia’s benchmark rate decision, and a lesson of timing was given as the AUDUSD squeezed traders for over 200 pips before giving back 60 pips and falling back under .8900. The two percent climb was the Aussie’s biggest gain against the greenback since June 2013.

The primary speculation on why the AUDUSD jumped as it did was due to the calmer language out of the RBA, which has been trying to talk the Australian dollar down as it was “historically high.” Leveraged funds increased their net-short positions to 63,973 in the week of January 28, according to the Commodity Futures Trading Commission (CFTC) commitment of traders data.

“The RBA’s statement was more hawkish than anticipated. The key here is that it’s going to be perceived as revealing an end to the easing cycle,” said Credit Agricole’s Mitual Kotecha, global head of FX strategy. There will likely be a capitulation of shorts, said Kotecha.

The RBA Governor Glenn Stevens said “on present indications, the most prudent course is likely to be a period of stability in interest rates.” However, Stevens said that the devalued Australian dollar will be helpful for the weak economy only if it is sustained. The AUDUSD may not be the easy short as seen over the summer, but a grind to .8500 is still highly probable.

Analysts have revised their targets to .85 cents per dollar by the end of the year, down from .88 cents since January 1. At Forex Root, the target of .85 cent was made late summer 2013 and likely to be achieved by the second quarter of 2014.