MUFG’s Head of Research Derek Halpenny highlights that the Australian Dollar remains the top G10 performer in February, supported by the RBA’s recent rate hike, but speculative long positioning has become stretched. Leveraged funds’ AUD longs are at their largest since 2017 and MUFG’s Z-Score shows record over-extension, suggesting growing risk of a near-term AUD/USD correction before a potential medium-term move higher.

Stretched longs point to AUD/USD pullback

"The Australian dollar has declined modestly today (mainly on general increased risk aversion) and positioning data released last Friday certainly point to more limited scope for further gains at these more elevated AUD levels."

"The positioning data released on Friday, to Tuesday of last week, revealed a further increase in Leveraged Funds’ long AUD positions – to close to 65k, the largest total AUD long position since October 2017."

"Our own Z-Score indicator (number of standard deviation moves based on an average of two years’ worth of data) measures the extent of over-stretched positioning and is now at a record in the data series going back to 2006."

"The risk-reward at these levels is certainly starting to look a little less attractive given the RBA stance now looks much better priced."

"Still, any correction lower in AUD would be a short-term dynamic and clear-out of positioning would be an ideal opportunity for re-entering for a medium-term move higher with the fundamental backdrop looking favourable beyond the short-term."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)