China Trade Crumbles, AUD Lower

The Australian dollar starts the week on the back foot after a troubling trade report from China. Last week, the Aussie struggled after the RBA rate cut and it starts a quarter-cent lower. CFTC positioning data showed EUR shorts nearing an extreme.

The US dollar starts the new week with momentum after non-farm payrolls. The data was strong almost without exception and the Fed took note immediately. On Friday, Atlanta Fed President Lockhart said a hike in June is possible. He typically shares the same sentiment as the core of the Fed and it means a high likelihoods that the reference to 'patients' before liftoff will be removed in June. A stronger signal could come from Fed Chairman Yellen at Humphrey Hawkins on Feb 24.

Given that backdrop, it's difficult to envision the dollar rally ending in the near term. Two violent dollar dips last week proved to be buying opportunities and higher Treasury yields will prove attractive for foreign capital.

A wildcard is oil. The volatility last week was almost unprecedented and certainly warrants caution.

The Australian dollar was on the back foot in early trading but the first bullet was dodged as PM Abbott survived a confidence vote. However, he's been wounded and it could only be a matter of time.

The larger factor for the Aussie was Chinese trade data. Exports fell 3.3% compared to a 5.9% rise expected. Imports plunged 19.9% compared to a 3.2% fall expected. Economists point to seasonality due to the lunar new year and the market has generally taken it in stride but it's not a great sign for the global economy.

The focus stays on trade with Japanese trade balance due at 2350 GMT. The December numbers are expected to show a ¥ -472.0B deficit, a significant improvement from the prior reading of ¥ -636.8B.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR -196K vs -185K prior JPY -60K vs -64K prior GBP -42K vs -45K prior AUD -56K vs -49K prior CAD -27K vs -24K prior CHF -5K vs -7K prior

The euro net short is the second-most extreme on record. The largest since the records began was in May 2014 and EUR/USD bottomed about two months later. Note that yen shorts – the darling of the FX market just a few months ago – are now hardly more popular than AUD or GBP shorts. If the range breaks to the upside in USD/JPY, that could draw in fresh shorts and make for a quick move to 125.