Against the backdrop of a harsher landing for the Chinese economy and an equally bumpy ride for the local economy, it is not surprising to see the Aussie bulls raising the white flag. According to the CFTC, net longs in the AUD fell by over 27K to 25,104 in the week ended May 8th, the lowest for six months. When the CFTC releases Aussie positions for this latest week, we are likely to see another sharp reverse in net longs, judging by the price action over the period.
With the bulls in full-scale retreat, and parity reached, it remains to be seen whether this critical psychological level offers any support. Back in August and September of last year, at the height of apocalyptic trepidation concerning the future of the single currency, the Aussie dropped from near the 1.10 level to 0.95. There were also two episodes in Q4 2011 where the AUD fell below parity without great difficulty. Overnight, some dovish remarks by RBA Deputy Governor Lowe contributed to the selling pressure and raised hopes that further rate cuts will be forthcoming in the coming months.
Although the price action certainly looks very favourable for the bears right now, caution is required as always. The jobless rate down under is below 5%, the banking system is well-capitalised, and the public finances are in decent shape (especially relative to most European sovereigns). In addition, from a technical perspective, the Aussie is becoming quite oversold. For the bears, they may well start to focus on the deteriorating current account deficit, which triggered a massive collapse in the currency in the mid-1980s.
All things considered, being an Aussie bull these days is a very uncomfortable role to play.
