China slowdown fears spark sharp rise in AUD short positions

The latest report issued by the CFTC – covering the period March 13 to March 20 – shows the net long position in AUD held by non-commercial traders on the International Monetary Market (IMM) fell from 67,000 contracts to 45,000 contracts. The notional value of the AUD net long went from $6.5 billion to $4.7 billion.

“The recent sell-off in AUD can be largely attributed to concerns over slower appreciation of the renminbi and slower growth from the Chinese economy,” says Mary Nicola, New York-based FX strategist at BNP Paribas. AUDUSD – which is widely traded as a proxy for Chinese growth – tends to correlate very well with the one-year USDCNY non-deliverable forward (NDF) which reflects overall sentiment in China, adds Nicola.

Weaker-than-expected Chinese economic data and comments from Chinese officials that the dollar-renminbi exchange rate is reaching equilibrium have weighed on the 12-month NDF, which has gone from pricing in more than 1% appreciation to modest depreciation.

In contrast to the sharp increase in AUD short positions, speculators reduced their short exposure in CAD by more than a third. The net long in CAD rose from 27,000 contracts to 42,000 contracts – a notional increase of $1.6 billion.

The notional value of the CAD net long now stands at $4.3 billion, a figure close to the net long in AUD. Improving US data at a time when the market is focusing on the prospects of a slowing growth in Asia to some extent explains the rising interest in CAD to the detriment of AUD and NZD.

Though the build up in the CAD net long might signal rising momentum for the Canadian dollar, this was not reflected in last week’s price action, with the CAD among the worst performers in the G10.

Camilla Sutton, chief currency strategist at Scotiabank, warns that the outlook for the CAD might not be as bullish as the headline figure might suggest, given that asset managers and leveraged funds remain short CAD.

In the euro, speculative IMM traders cut back short positions by more than 6,000 contracts while expanding EUR longs by 10,000. Despite rising risk-premia on Spanish bonds, euro pessimism has fallen considerably, notes Ulrich Leuchtmann, chief currency strategist at Commerzbank. “FX traders are no longer focusing on the eurozone crisis and will not do so as long as the ECB continues to provide ultra-long dated liquidity for the banks in peripheral countries,” he says.

The biggest relative shift in positioning was seen in the Mexican peso, with shorts increasing almost 10 fold, narrowing the net long to under $1 billion, down from over $3 billion the previous week. The strong addition to the MXN shorts was not unsurprising given its sensitivity to market sentiment, which initially fell during the period covered by the report, said Henrik Gullberg, FX strategist at Deutsche Bank.

Gullberg notes however, that the net long is likely to have recovered since then: “Last week, MXN was one of the few EM currencies to actually outperform the dollar, indicating that market is increasingly confident about the US recovery.” Deutsche’s in-house positioning report that captures activity until the end of the week also indicates a rebuilding of MXN longs.