fter a roller-coaster ride against the US$ for the last 25 years, can the A$ finally achieve parity?
The seemingly inexorable rise of the Australian dollar to parity (US$1) with its US counterpart received a major boost last Wednesday, when market reaction to the higher-than-expected March quarter Consumer Price Index (CPI) figure galvanised the Aussie to a 24-year high of 95.4 US cents.
But reaction since then in the currency derivatives markets shows that not all traders believe in the prospect of parity.
“For the last few months we’ve seen people simply jumping in following the trend of a rising A$ against the US$, but over the last couple of days we’ve seen the majority of our client base move to a short position,” says Robert Francis, general manager, Asia-Pacific, at foreign exchange trading platform EasyForex. “In other words, everyone is trying to pick the top of the market.”
Over in the FX contracts for difference (CFD) market, things are a bit different. “People are predominantly long the A$, going with the trend and believing that the US$ will stay weak,” says Oliver Stevens, head of dealing at CFD provider IG Markets. “About 65-70 per cent of our clients are long the Aussie.”
Once the A$ broke through 94 US cents earlier this year, says Stevens, the market began to view parity as inevitable. “It’s much like we saw with gold when it was trading at US$950, everyone started to believe in the inevitability of $1000. Oil was the same when it was approaching $100. Once you get close to these round numbers, it’s very rare for them not to trade there. People tend to think that the A$ is close enough to parity for the market to drag it up there.”
Francis, too, recognises this “love of round numbers” that markets tend to exhibit, but says his margin forex client base is betting against it.”
On the Australian Securities Exchange (ASX), exchange-traded currency warrant traders are sitting on the fence, says Pia Cooke, division director at Macquarie Equity Markets Group.
“Given the fact that the dollar hit that record high post the CPI numbers, plenty of people think that it’s going to parity, and they’re going long in the currency warrants. There is pretty strong volume in the AXUWME, which is a $1 call.
“But on the put side, investors have also been going short using the AXUWMY, an in-the-money 93 cents put: they’re betting that the currency will fall to 93 cents or below. The AXUMW, a really deep in-the-money 85-cent put, has also seen some buying. So the sentiment is spread, despite the chatter in the market about parity,” says Cooke.
Stevens says most FX CFD traders are not looking to trade the dollar to parity: they’re more short-term in focus than that. “FX CFDs tend to be very short-term in nature: people trade quite small movements in the underlying. Because the A$ CFD has a two-pip spread, it’s very easy to make up the spread, and you can often see a 100-pip (one US cent) move in a day.
“We find that people trade intra-day, especially around the time of economic figures that come out, like this week’s inflation figure. It might be a ten-minute trade. We don’t see too many people holding positions for a month or so, as you would with an equity CFD. Currency changes very quickly, so traders are looking at a much shorter time-frame. They may not have a particular view that the A$ is going up in the long term, but they’re looking to trade the next 50 points of movement.”
Francis says EasyForex’s ‘Inside Viewer’, which shows what the majority of its clients are doing, shows that most don’t expect to see parity. “Effectively, the Inside Viewer is a straw poll of what the market is doing – and it shows that people are looking to short the dollar, based on the fundamentals: although we had a high CPI number, it doesn’t look like the Reserve Bank will raise rates, they don’t see any further appreciation in the dollar based on increased rates.”
But he cautions that it is not only Australian economic fundamentals that work on the dollar. “Of course you need to consider that currencies rise and fall because they’re compared to another currency. So if you see a weaker US$ because of the US’ economic concerns, you’ll see a stronger A$.”