To use an American gangster analogy, recent trading in the Aussie dollar has been somewhat akin to the infamous Saint Valentine’s Day massacre in Chicago in the winter of 1929. Certainly there are always (financial) victims when a currency falls nearly six cents over two trading days – that’s how hard the dollar crashed in the wake of the US sub-prime crisis.
On August 16, it was trading around 82 cents against the greenback; by the close on August 17 it was below 77 cents – a bloodbath. Remember, too, the dollar was heading towards 90 US cents in late July before the fallout from jittery US markets began to take its toll on our currency, slipping nearly seven cents to 82 US cents on August 16.
It was only when the US Federal Reserve’s decided to pump liquidity into its domestic economy by cutting the official interest rate 50 basis points on August 17 that a degree of sanity returned to the market. For the Aussie dollar, it saw investors returning to the carry trade market – where investors exploit an interest rate differential between currencies – with a degree of confidence.
But not complete confidence, a point Robert Francis, general manager, Easy-Forex, makes strongly. “In the past three months or so, the market has changed. People are being more cautious than they were. Where the market was being driven by the carry trade, especially the Aussie and Kiwi dollars (and even sterling to some degree), the current credit crisis in the US has made investors more cautious; right now there’s a lot of nervousness out there, and I expect the market to continue fluctuating.”
That said a fluctuating market can be a boon for traders with a strong constitution. “In that period when the Aussie took a hammering we had a number of clients who made money shorting the currency. Currencies tend to rise slowly and fall quickly, and those prepared to ride the fall with short positions can profit from it.
“At the same time there were a lot of people out there who were really hurting. Holding a long position when the dollar is falling, well it takes a lot of intestinal fortitude to continue believing it will rebound. But as we’ve seen, it has rebounded. But to benefit from that rebound you had to hold your nerve, and that’s not easy when the market is going against you, especially when you’re margin trading.”
Volatile markets – and massive losses – notwithstanding, currency trading is no longer the preserve of the institution. Kunal Sharma, managing director and co-founder of Forex Capital Trading, says: “Thanks to the Aussie dollar going past 90 cents against the greenback, currency news is on the front page of every newspaper, generating more interest about how to profit from heavy market movements.
“Retail forex appeals to the young and old. Mature investors look for a high leveraged product that provides an exciting alternative to fixed income, property and shares. Young and new investors relish the ease with which they can start an account and are part of a market that is open 24 hours a day and, given its volatility, has the potential to generate quick profits.”
Like most analysts, Sharma remains bullish about the Aussie dollar – he predicts 95 US cents in 2008 – citing several factors:
Interest rates – at 6.5% compared with the US at 4.75% and Japan at 0.5%, offshore investors continue to invest here in the carry trade.
Share markets – If Dow Jones Index and NASDAQ rise then investors tend to buy high yielding currencies.
Commodity prices/Asian demand – If key commodity prices rise so too does the Aussie dollar.
Francis has a similar view. “Dresdner (Bank) has been suggesting parity with the US dollar some time next year. I don’t know about that, but there’s certainly room for the Aussie to rise above 90 US cents. The economic fundamentals in this country are very strong; we’re not only in an economic boom; we’re in an employment boom.”
To some degree, Francis and Sharma still hedge their bets on the Aussie. Not so Sonray Capital Markets’ chief economist, Clifford Bennett, who says the dollar is the “standout currency story, positioned well as a commodity exporter on the door of Asia, possessing a high yield, and in an environment of a declining US dollar”. Even the unwinding of the carry trade will not, in his opinion, prevent its inexorable march towards parity with the greenback.
For Bennett, it’s not just a case of a strong Aussie dollar – the greenback “is in a state of long-term historical decline”. He says: “Right now I believe we’re looking at an immediate and dramatic shift in the ‘psychology’ towards the once mighty US dollar, a shift that’s strongly supported by the fundamentals, and could rapidly turn into a one-way market.”
Retail traders, you have been warned.