A perfect storm of events has turned steadfast Aussie bears into furtive Aussie bulls recently, analysts said.
Wednesday’s rally to four-month highs near $0.9245 further cemented budding bullish A$ sentiment, with talk now of a further rally to $0.9450 (November 20 highs) and beyond, they said.
Four to six weeks ago, Aussie was struggling to break above $0.9100 and stalled on several occasions in the $0.9050/$0.9080 range, weighed by uncertainty about China growth and weak Australian data (employment and capex).
On March 6, the day before U.S. non-farm payrolls, Aussie broke above $0.9100, aided by extended short positions, improved risk sentiment and upbeat Aussie trade data, only to fall to $0.8924 less than a week later as Chinese yuan weakness, a slide in copper prices and risk aversion due to the Crimea Referendum weighed.
Since then, Aussie has been on a one-way path higher, underpinned by several factors, including still extended short-positions and a shift in sentiment regarding the Reserve Bank of Australia.
“The Australian dollar’s strength here in Q1, up 3.5% against the US dollar, has caught many off guard,” said strategists at Brown Brothers Harriman.
CFTC data, released last Friday for positions as per March 18, showed that speculative accounts were short 24,463 contracts, about 40% less short than the prior week (40,850 contract net short
“This is largely a function of new gross longs entering – the speculative longs more than doubled (rising almost 13k contracts to 21.6k),” BBH said.
The $0.9210 zone, vaulted earlier, corresponds to a 50% Fibonacci retracement of the Aussie’s decline since last October’s peak near $0.9760, the strategists said.
“The next target for the new Aussie bulls is near $0.9340,” they said.
Aussie was trading at $0.9224 Wednesday afternoon, on the high side of a $0.9154 to $0.9245 range.
This week, on Monday the pair took out key resistance in the form of its 200-day moving average, currently at $0.9138, with stop-losses tripped off on the break.
There was further follow-through Tuesday and again Wednesday, with the more decisive break higher tripping off stops above $0.9175.
The break above the 200-day moving average, suggested that Aussie “should rally to the reverse head and shoulders target at $0.9500,” CitiFX technical analysts said.
Traders attributed the Aussie run-up on the day to still extended short positions as well as a speech made by RBA Governor Glenn Stevens earlier.
Not only did Stevens not use the opportunity to talk the Aussie dollar down, as some players expected, but also, he was more upbeat about the economy than expected in his commentary.
Stevens said that measures of business confidence have improved over the past six months and said it was clear that “dwelling construction activity will rise strongly over the period ahead.”
There was also “encouraging early evidence that the so-called ‘handover’ from mining led demand growth to broader private demand growth is beginning,” Stevens said.
“Putting all this together, we think economic growth will continue, and may strengthen a little later this year and pick up further during 2015,” he said.
Richard Franulovich, Westpac’s New York based currency strategist, observed that market players had been short Aussie in prior months “for all the right reasons.”
These accounts later got squeezed, with the recent Aussie rally driven largely by stop-loss buyers, he said.
Wednesday’s rally was sparked in part by RBA Governor Glenn Steven’s comments, he said.
Steven’s assessment, looking for improved growth this year, “That was a genuinely important statement,” Franulovich said.
However, with the venue in Hong Kong, Governor Stevens may have been trying to be a bit of a “cheerleader” about the Australian economy, he said.
Franulovich planned to eye Steven’s next appearance (April 3 in Brisbane) for further insight.
“Let’s see if he gives the same speech to a domestic audience,” he said.
The RBA meets next April 1, with market players looking for the cash rate to remain unchanged at 2.50%.
In February, the RBA changed its policy stance to neutral from its prior mild easing bias, and guided to a period of stable interest rates “if the economy was to evolve broadly as expected.”
The change in stance comes after an easing cycle that began in November 2011 and resulted in total cash rate cuts of 225 basis points. The rate hit a record low of 2.5% in August 2013.
The central bank earlier released its Financial Stability Review (FSR).
The RBA said it does not see a risk to financial stability in the near term from current housing market conditions, which have seen a pick-up in investor activity, but will monitor activity closely for signs of risky practices and excessive speculation. (See MNI mainwire at 7:12 a.m. ET).