The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
By Marc Chandler
NEW YORK (
BBH FX Strategy
) -- The Australian dollar held support in the middle of last week, near $1.04. Yield-hungry Japanese retail and institutional investors have taken a new look, especially as they begin trying to diversify away from the Brazilian cash register. There is still scope for another rate cut from the Reserve Bank of Australia, possibly in May, but this has largely been priced in.
Consider what has happened in the past five days. The Australian 2-year yield has risen 25 bp, compared with a 5-bp increase in the U.S. and no change in the Japanese 2-year rate.
Many participants see the Aussie as a play on commodity prices. The CRB index is at its best level since earlier this month, when it gapped lower. The gap created by the lower opening on March 6 has been closed today. Copper prices are also firm, with the May contract negating the potential reversal seen at the end of last week.
This is a tactical call, rather than strategic, as the Australian dollar still appears largely range bound. Initial resistance comes in near $1.0640, which corresponds to a retracement objective of this month's decline as well as the 20-day moving average, but we look for it to be overcome and for the Australian dollar to test the $1.07 area before the end of the week. The real objective comes in the $1.08-$1.0850 band.
In terms of speculative market positioning in the IMM futures market, the net long position was pared back from the 78.2k contracts at the end of February to 61.7k contracts in early March. The most recent weekly report shows a modest rebuild, but at 66.7k, does not appear over-extended.
More impressive than the modest increase in new longs and a modest cut in existing shorts was the huge jump in spread positions. They jumped from almost 3,400 to 17,000 contracts, which is by far the largest since at least the early 1990s, underscoring the significance of new carry trades now that the yen bears are back in the driver's seat.