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Zack Zarr

Trade Idea - Large Speculators on AUD: let's try one more round!

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Let's talk AUD. From multiple points of view, AUD shows mixed signals which I discuss below.

Interest rates

Since the beginning of 2016, or better say late 2015 when the Federal Reserve started raising rates, there has been a major change in the directional movement of rates on USD and AUD. Chart below clearly shows how RBA slowly cut rates since then while the Fed held on to the 0.5% for a while and then pushed the rate higher for the past 2 years. 


Such a change in the direction of rate from the two sides clearly has had its impact over the past year and half judging by the continuous drop in AUDUSD price. RBA cut their rate by another 25 basis point last month which could be major bearish signal. But more often than usual, the actions of RBA are well predicted in advanced so we could say the rate cut was already priced in the AUDUSD  price. But the rate differential is definitely in favor of USD for the time being. From this viewpoint, the pair should still feel pressure to the downside. 

COT data

Looking at the reaction of the pair to the initial move in early 2016 shows insignificant bearish impact (see chart below).


In fact, for another 2 years, the AUD continued to gain strength. Looking at the positions of the large speculators, it was clear at the time (early 2016), they are accumulating any shorts and were net long on AUD. Since the dynamic change around May 2018, they turned into net short and have been short since then. 

The major development starting around April this year has been some sign of long accumulation for the large specs. However, it was until very recently that they started reducing their short exposure as shown on the chart. It is worth noting that such scenario happened awhile ago in September 2018, but they failed in that attempt and got back into their shorts. It just seems to me that they are giving it another shot and so do I !

Position sizing at the moment

Let's look into the data in more details:


The only factor worth discussing are the recent dynamics in the long and short positions. The three major supply zones (red shading) indicated on the chart are where the large speculators added major shorts except the very top one which could have some shorts mixed up with the zone right below it. The recent demand zone (green shading) was the point of initiating some longs. It was also the area where almost all shorts started around the above supply zone were closed over the past few weeks. Essentially the supply zone which the price is currently at has almost no shorts. Also, those longs initiated in the demand zone were also all closed in the above supply zone. So what's left?

Except for about 11K longs started earlier in May (which are not closed yet), I expect an addition of some longs over the past few days rally in price. The price rally can also be caused by closure of more shorts initiated from the zone near 0.72 which makes the long case stronger. 

Trade Plan

Based on the price dynamics over the past several weeks, the chart below summarizes my trade plan for scaling into a long position.


Depending on the COT data this coming Friday, I will start a long trade from near 0.70. Obviously, I will stay in that trade if I see more sign of short closure. 

Note: the price might end up coming further down to 0.69 area but unless I see more long closure (unlikely) and more short adding, I will stay in the trade.

We need to realize that the large specs need to take care of a huge amount of shorts at the current price levels before pulling the price even higher. So, any drop in the price is another opportunity for closing more shorts. And one thing always stay true: they will dump all those shorts and take their relative longs exposure to 100% before price takes off. and that means patience. Once the price shows clear sign of aiming at the top supply zone around 0.72, I expect more short closures and I will add more to my long.

This is a game of probability and following the footsteps of these large speculators. These are speculators after all, so I don't expect anything more from them. Just that they are much more informed than us, but they can be wrong and will be wrong from time to time.

I will keep you posted here on this thread. 






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