Australian dollar exchange rates: AUD heads lower BUT beware the reversal

The Australian dollar (AUD) has weakened against all of its major peers on speculation that the currency’s recent leap to 90 US cents was overdone.

The Aus dollar has fallen for the first time in four days versus the USD’, retreating from the highest level in almost a month, as technical indicators signalled a reversal. A look at the latest exchange rates shows:

• The British pound to Australian dollar exchange rate is 0.6 pct higher on a day-to-day basis at 1.8407.
• The euro to Australian dollar rate is 0.57 pct higher at 1.5288.
• The Australian dollar to US dollar exchange rate is 0.6 pct lower at 0.8917.

PLEASE NOTE: The above quotes are taken from the inter-bank market. Your bank will affix a discretionary spread when passing on a retail rate. However, an independent FX provider will guarantee to undercut your bank's offer, thereby delivering up to 5% more currency. Please learn more here.

"The Aussie continued to weaken broadly although the November trade deficit improved from AUD -358M to AUD -118M. AUDUSD retreated to 0.8912, crossing the 21-dma (0.8933) to the downside. Light bids are seen above this level, while stops are building below 0.8900 (with large option offers expiring today). AUDNZD spiked down to 1.0782 in attempt to clear support at 1.0800," says a foreign exchange note from Swissquote Bank.

Despite slightly worse-than-expected Services PMI data from the UK yesterday, the pound traded within a range against the aussie dollar and closed almost exactly where it opened.

"Although the Services figure was below analyst forecasts it still revealed a growing services sector, which is why the data didn't dent the pound too much. Aussie trade balance figures overnight showed an improvement from last month, but this has failed to offer the aussie any support and the pound is actually gaining against the Australian currency this morning," says Sasha Nugent at Caxton FX.

Markets will now focus on Australian retail sales and building sales figures due tomorrow night, followed by the Bank of England policy announcement, due on Thursday.

Beware a short-squeeze higher

It must be kept in mind that every man and his dog is currently betting against the Australian dollar - a dangerous situation should there be a reversal.

Such a 'short-squeeze' is likely to go far before the trend re-establishes itself ensuring some speculators are caught short.

"Speculative AUD short positioning is at all time highs. Both leveraged funds and asset managers are very short the currency, perhaps
explaining the squeeze higher in AUD/USD of the last few days," says Deutsche Bank.

Lloyds Bank Research warn of a recovery

Also warning on a short squeeze in the Australian dollar (AUD) is Lloyds Bank Research:

"Short positions in AUD and CAD remain significant, but there has been no clear direction in these currencies in the last week or two. The correlations with equities and commodity prices which have typically been the drivers of these currencies in recent y ears have largely broken down, and weakness in recent months is based more on valuation perception than recent data or typical correlations. This suggests there is a risk of a recovery in both currencies in the absence of news supporting the recent negative trend."

So while the outlook for the Australian dollar remains challenging it is worth keeping in mind that recoveries are possible and they could be substantial.