Aussie Rules!

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

The unwind is on in the aussie!

After accumulating a historic net-long position last fall, commercial hedgers are scrambling to cover. Over the past four weeks, the smart money has trimmed its long exposure to roughly half of what it was.

This is reflected in our most recent Commitment of Traders Heatmap, which you can view here.

When positioning flips at extremes – like we’re seeing now in the Australian dollar – we want to look for opportunities to ride the emerging trend. In other words, we want to bet in the direction that commercial hedgers are currently unwinding away from. 

In the case of AUD, they recently had a historic net long position. As such, we’re looking for bullish technical characteristics to see if a long setup makes sense here.

It just so happens that things are really coming together for the aussie chart lately. We love when technicals and sentiment line up like this.

Here’s a weekly chart of Australian dollar futures with COT positioning in the lower pane:

Notice the commercial positioning highlighted in red in the lower portion of the chart. It’s rolling over as commercial hedgers rush to cover their excessive long exposure.

This is when our COT data is most valuable – at extremes.

It's not unusual to see a dramatic flip in positioning coincide with or precede an explosive rally. We think this could be in store for the aussie in the coming months.

In addition to the COT profile, the AUD is also setting up for a primary trend reversal. You can see this clearly when we zoom out on the weekly chart (shown above).

It’s been carving out a multi-year base below the 2018 peak around 0.8150 and looks poised to make a run for those former highs.    

Additionally, a bullish divergence in momentum is signaling exhaustion in the recent downtrend and suggesting a potential reversal could be underway.

We can see this when we zoom in on a daily chart. Here it is with the 14-day RSI:

Notice the bullish momentum divergence that was in place just before price rebounded off the January lows. 

With commercial hedgers unwinding their position, momentum improving after a bullish divergence, and price showing signs of a reversal on both weekly and daily timeframes, the evidence is mounting for a strong upside resolution.

We want to get long the Australian dollar.

A good place to define our risk is the former pivot highs from last fall.

For our pattern folks, this also marks the peak of the right shoulder of a potential head & shoulders top formation. If it breaks above that level it’s probably not a head-and-shoulders top.

Instead, it’s a failed top… and we just love it when patterns fail.

If and when the aussie reclaims 0.7550, we’re buyers on strength with an initial target around 0.8150 over the next couple of months.  

We really like the way things are setting up for AUD and think it’s only a matter of time before it catches higher. From an intermarket perspective, there's very strong supporting evidence for a stronger Australian dollar.

From interest rates rising around the world to the broad strength in commodities and cyclical stocks, the environment is ripe for AUD strength. 

And just like commodities, we believe the aussie and other commodity-centric currencies could be in the early stages of structural uptrends that could last for years to come.

Stay tuned!

As always, let us know what you think.

And be sure to download this week’s Currency Report!