Australian dollar about to jump on RBA policy error?

According to Bloomie, hedge funds are long the Australian dollar:

• Leveraged funds hold a net long position of 20,509 contracts in the currency.
• Various hedgies talked their own book for higher on the forthcoming speech by Phil Lowe and the next jobs report.

Actually, the overall market is now short the AUD by 9k contracts so the leveraged funds are contrarian:

It’s a long time since we’ve seen such a period of confused trading in the currency. To my mind this represents the titanic struggle between record pressures from commodity tailwinds and record pressures from yield headwinds for the carry trade. Ease one the break, either way, will be material. Westpac has more:

Thu 17th dominates the week: RBA Governor Lowe speaking in QLD just ahead of May labour force survey. RBA’s June minutes (Tue) will also be read closely.

•AUD/USD is virtually unchanged from a week ago, with the sub-consensus US jobs data reviving the Aussie from a spell below 0.7700. This highlighted how swings in US dollar sentiment have been more influential for AUD/USD than local news for some time. As the chart shows, the correlation of daily changes in DXY and A$ is very high even in historical context.

•This places particular attention on US May CPI and of course the FOMC meeting. Our underlying bias is for USD depreciation but we should brace for volatility after the meeting.

•A$’s commodity price support remains very strong, with spot iron ore back to $212/t, coking coal at highs since Aug 2019 and oil (thus LNG) marching higher, though copper has softened.

•We suspect AUD/USD sees choppy price action post-FOMC but with fair value 0.84+, are happy to remain long from 0.7680, adding on dips to 0.7580. If Lowe gives clear support to those calling for QE taperinga nd May jobs rebound, the gap to fair value should shrink.

Which is a very good reason why he should not. The Bank of Canada was faced with similar commodity versus yield pressures and its shift towards tightening has been rewarded with a skyrocketing Loonie, via BMO

USDCAD: In the two weeks following the April 21 BoC decision, USDCAD broke through several layers of support made its way down to 1.21. At the time, our model still had fair value for the pair on a 1.24-handle, so per the model, spot USDCAD was oversold (see Figure 1). Spot USDCAD ran out of steam as it approached 1.2000 and has since traded in a range loosely defined by 1.2000 to 1.2150. That range is now about a month old. But while spot has flatlined, various fundamentals have continued to grind in CAD’s favor. One of those fundamentals is the 2Y interest rate differential, which has moved about 5bps in CAD’s favor. Another CAD-positve evolution in financial fundamentals has been the equity rally, with the S&P 500 up 3% since USDCAD last closed above 1.2150. But by far the biggest move in financial fundamentals over that interval has been the commodity rally, with the Bloomberg Commodity Index (BCOM) up 4% since USDCAD last closed above 1.2150 on May 13. Within the commodity complex, the oil move has been particularly noteworthy, with WCS-grade oil up 10%. Our model rotates factors in and out of play depending on the extent they have been related to USDCAD over the preceding 3 months. As of yesterday’s close, our model selected a new #1 ‘driver’ for USDCAD: BCOM. As shown in Figure 2, the BCOM rally has caught up to and seemingly passed the CAD rally. With that, the model no longer registers USDCAD as being oversold. Spot is now within a few pips of fair value. In fact, as we write, spot USDCAD is about 10 pips above FV, so if we were to close exactly where we’re at for spot and underlying fundamentals, the model would kick out its first short signal since April 23.

After all of the RBA’s hard work to introduce a new, more competitive monetary regime, it should not jeopardise inflation prospects with roaring currency by moving too early.

There is still plenty of slack in the labour market, the recovery boom is peaking, inflation is absolutely nowhere, wages are crushed, and commodity support is going to bust in the six months as China slams the credit brakes.