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The Australian Dollar (FXADUS) has been powering up from its May lows around the 80 US cent level and at time of writing (Wednesday September 28, 2010) it has traded as high as 0.9686, just short of the 97 cent level.
Once again, the talk has turned to parity. For those who are unsure, the term “parity”, in this case, would be a level where one Australian Dollar is equal to one US Dollar, or 1.0000 on the chart.
The questions for us as traders are a) will the Australian Dollar reach this level, and b) is there still money for me to make out of this move?
As to the first question, I have said from the start of this year that I believe the Aussie Dollar will reach parity but I don’t think it will do it in 2010. But for this article, I want to focus on the second question – is there money to be made out of this move?
Let’s take a look at the chart first. In Chart 1 below, I am using FXADUS in ProfitSource. Normally I would study the AD-Spotv chart, which is the futures contract, however due to the interest rate differential and the “cost of carry” the futures contract is trading at a discount to the Spot FX price, so we will use the Spot FX price.
Chart 1
click to enlarge
You can see that after spending much of the year in a sideways to bearish range, the Aussie Dollar has just recently pushed through to new highs for the year and is now getting close to the 0.9849 high of 2008.
Now from a trading perspective, take a look at the ranges of the Aussie Dollar over the past two years. It fell nearly 4000 points or 40 cents from the July 2008 high and then rose from the October 2008 lows almost back to the July 2008 high. This is a fluctuation of nearly 8000 points over approximately two years – at $US10 per point per futures contract, there were plenty of opportunities to make money from this one currency pair alone.
Now let’s look at the current situation. There are traders and investors who have been long the Australian Dollar for quite a while and would no doubt be showing some pretty handy profits by this stage. Then, there are those who have heard on the news, probably in the past week or so, that the Aussie Dollar is “heading to parity” and they will be looking to jump in to take advantage of this.
If you were to buy the Australian Dollar now with the intent of trading it up to parity, you would have potentially 300 points (1.0000 – 0.9700) of profit ahead of you. On the flip side, imagine this market fell back down to its May 2010 lows – that would be a risk of over 1500 points. If it fell back to its October 2008 low, that’s over a 3500 point risk.
The point I am making is that if you are not already long the Australian Dollar, now is perhaps not the best time to be jumping in – the risks are near their highest and the reward is lower than it should be.
For me, there would be two scenarios that would provide potential entry setups:
Firstly, if the Australian Dollar was to break through the magic 1.0000 mark, then come back to sit on that level. Or, if the market has a retracement of its current run and gives another higher bottom to trade out of.
For me, the second option would be the more likely of the two. While I am long term bearish on the US Dollar, and long term bullish on the Australian Dollar, I’m still not convinced that the “Day of the Aussie Dollar” has arrived. It’s not far off, but I don’t think it’s here yet.
As always, make sure you manage your risk and only trade when the reward to risk ratio is in your favour.
Be prepared!
Mathew Barnes
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