Thursday, 26 September 2013

Australian Dollar Surfs US Nervousness

It has long been our contention that markets move in the direction of the money flow. 

Granted, the flow of money is not always visible, especially in the short-term when disguised with the use of derivatives and invigorated with leverage.  Usually, the total size of a market will increase, and the market will trade lower when there is new short selling. 

Conversely, with new long buying, the open interest goes up, as does the price.

Looking at the weekly chart of the AUDUSD for the period of 28 April 2013, the closest corresponding period for the COT was April 30th 2013.  On that date, specs were long 33,084 contracts.  On the way down this massive 1500 pip move, specs have flipped to over a 100K contract short, in addition to selling their long - that means they were sellers of over 100K of new contracts.

The rally back from the low of triple bottom just above the 88 handle has been gradual, but has managed to bounce about 600 pips.  In the process of this rally, the specs have liquidated all but 38.3K of their A$ shorts, which is what gave us the 600 pip rally.

With the short A$ position about covered, does this mean the A$ rally is about over?  It could be.

Click to Enlarge AUDUSD Weekly Currency Chart

If we look at the open interest for futures only on Wednesday, we note that the open interest in the Australian Dollar is down to only 126K through Tuesday.  Going back to September 1st, the Open Interest (OI) in the A$ was 189.  Compare this to the OI in the Pound on that date.  Then, the pound OI was 151, and now the pound OI is 164.

Click to Enlarge GBPAUD Weekly Currency Chart

Clearly, the British pound is a currency that has been in vogue and the A$ is out of vogue.  The money flow is into the pound and out of the A$.  Time this one right and it promises to be a big time trade.
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