The risk-sensitive Australian dollar has strengthened during the Ukraine crisis, surprising hedge funds shorting the currency and raising the prospect of further gains to cover short positions.

The risk-sensitive Australian dollar has strengthened during the Ukraine crisis, surprising hedge funds shorting the currency and raising the prospect of further gains in the currency to cover short positions.

Zhitong Finance APP has learned that the latest data from the U.S. Commodity Futures Trading Commission (CFTC) shows that leveraged funds increased their net short positions in the Australian dollar by 47% to 46,907 contracts in the week ended March 8. This is the first increase since 2015. the highest level since September. However, the Australian dollar hit a four-month high last week and is the best-performing G10 currency since February 24.

Ray Attrill, head of foreign exchange strategy at National Australia Bank in Sydney, said this shows that speculative traders have not believed that commodity prices are driving the Australian dollar higher, believing that negative risk sentiment will eventually overwhelm and push the Australian dollar lower. "If Australia-related commodity prices remain elevated (which we have every reason to believe they will), coupled with still-expanding short positions, the likelihood of greater short covering in AUD/USD at some point is very high . "

The conflict between Russia and Ukraine has accelerated the recent surge in commodity prices, as the trade deficit is likely to widen, putting pressure on traditional safe-haven currencies such as the yen. The Swiss franc's decline is partly due to the country's proximity to conflict zones. These factors, in turn, are putting upward pressure on the Australian dollar, as derivatives suggest the Reserve Bank of Australia will raise interest rates five times this year.

Westpac chief economist Bill Evans wrote: "Australia's distance from Ukraine and Russia may offset Australia's traditional position in the market as a 'risk asset'. With risk concerns gradually easing in the second half of 2022, and The Reserve Bank of Australia will begin its own tightening cycle in August, and the boost to the Australian dollar from rising commodity prices may be more lasting.”

Westpac raised its year-end Australian dollar forecast to $0.76 from $0.73. The Australian dollar fell 0.6% to $0.7252 on Monday.