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Are Things Looking Up Down Under for the Aussie Dollar?

Monday, 13 Aug 2012 | 4:03 PM ET
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Between the ongoing crisis in Europe, a recession in Britain, and slowing growth in China, you could say it would be reasonable for investors to pull in their horns a bit.

Well, don't look now, but the reverse is happening with the Australian dollar.

The Aussie, long a proxy for risk appetite, is seeing a big jump in net long positions — bets that the currency will continue to rise — according to new data on traders' commitments. And it's happening just as net long positions on the safe-haven U.S. dollar are shrinking.

So what gives?

At least one analyst believes it has to do with the aggressive way major central banks are managing market expectations. The European Central Bank (explain this) is crafting a response to the euro zone's debt crisis that is likely to include massive bond-buying; meanwhile, the Federal Reserve (explain this) may unleash a third round of quantitative easing (explain this) if the U.S. economy swoons once more.

"As global central bank policy has diminished tail risk and crushed volatility traders are adding to risk positions," says Camilla Sutton, chief currency strategist at Scotiabank, adding that she expects this to continue.

Sue Trinh, a currency strategist at RBC Capital Markets, is more guarded. She notes the Reserve Bank of Australia has expressed concerns about the impact of a strong Aussie dollar on the economy, which could curb its gains.

She also points out that the buildup of the long position has been relatively rapid, considering that investors had record net short positions — bets that a currency will fall — on the Aussie in early June. "These data are worth keeping an eye on," she says.

Indeed.

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