Aussie dollar bulls unbowed despite disappointing March

[SINGAPORE] Hedge funds look steadfastly bullish on the Australian dollar despite its decline against the greenback in March. The nation's employment data this week may provide an insight into why.

The currency saw its worst performance in five months against the dollar in March, falling 1.4 per cent, as a combination of rising Treasury yields and confirmation of the Reserve Bank of Australia's dovish monetary policy weighed.

However, signs are emerging that the Aussie could be due for a rebound after key support around the US$0.75 level remained intact, a closely-watched gauge of momentum known as slow stochastics turned bullish and the economy continues to trump expectations.

Leveraged funds are certainly signaling that they think the currency will strengthen. Speculators increased their net long Aussie positions to the highest since November by the end of March despite the currency's weakness, before a modest pullback last week, according to Commodity Futures Trading Commission data.

Bulls searching for catalysts to spur the currency higher may have to look no further than this week's Australian employment data.

The unemployment rate fell to an eleven-month low of 5.8 per cent in February, and a further decline this week could boost the Aussie as confirmation the economy is on a strong footing.

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Gross domestic product grew by a larger-than-expected 3.1 per cent year-over-year in the final three months of 2020.

A falling unemployment rate isn't the only positive factor for Australia's currency. Treasury yields look to have put a near-term high in place, retreating from their recent peak despite strong US employment and ISM data. In addition, iron ore prices remain close to this year's highs, helping to support the Aussie.

The Australian dollar "can appreciate further because it is undervalued relative to its fundamentals," Commonwealth Bank of Australia strategists including Kim Mundy wrote in a recent note.

"We forecast a further strengthening in commodity prices over 2021." There are still headwinds facing the Aussie, including an expected cut in Chinese steel production and carbon border fees which could weigh on the currency, the strategists added.

But the risks still appear skewed to the currency appreciating against the dollar over coming months, with a rise to US$0.80 possible by June, they concluded. The Aussie traded around the US$0.762 level Monday.

BLOOMBERG