AUDUSD – short now, long later?

I think DLS could well be right about AUD hitting COVID lows, but how to position and what to expect?

Right now with QT (or at least no QE) there is a global dollar shortage. With rising rates as well, returns on USD look better than many other assets. Shorting AUD for USD will currently gain you a 1% rate differential in your favour without any price movement at all. This makes a medium term (months) bet against AUD via CFDs look very affordable to me.

IMO you never enter a trade without having some well defined exit plan. So, if I’m going to short AUD, what’s the expected end point? Since we were at 0.65 handle in the last 24h, a handle starting with a 0.5 doesn’t seem far away at all. But what could go wrong?

  • The interest rate differential collapses unexpectedly. CBs seldom suprise these days…but who knows?
  • East Coast gas reservation or nationalisation. Short term, this would be negative due to perceived immediate reduction in export earnings. Long term, this is AUD positive as it would boost competitiveness and maybe tax receipts. Seems unlikely before year end.
  • China starts a war. Seems too early to me though.
  • Margin call – AUD temporarily moves up more than you budgeted for.

I’m sure there’s more. That’s why I’m appealing to the brains trust!

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I remember almost a half a century sticker at the back of an electrician’s van:
girls, don’t risk it, let an electrician check your shorts

wars need iron.
AUD to da Moon

Ramjet

Your biggest risk for the USD is the oil producing countries happy to be paid in Yuan or Roubles. Essentially a non USD currency. I would add a prolonged recession for the US, but they are already in one.

Australia’s risk is more of a house price decrease. Well our economy is just house flipping, ticket clipping and coffee sipping.

I guess which one are you betting would happen first?

Shorter term currency movements are more akin to gambling for me. Longer term would have more certainty for me ie structural decline of the west.

ThePensum

Settling oil via yuan is a long way away. apparently the oil futures in CNY have been a fizzer.

Freddy

If the RBA was silly enough to do what DLS says and leave rates alone then yes the AUD would reach covid lows.

During the GFC the RBA directly supported the AUD at 63c by intervening in the FX markets. They also intervened in 2020 to push the AUD back up in quick time. I feel that shorting the AUD at current levels is a bit like the proverbial picking up pennies in front of a steamroller.

I was thinking that the RBAs choices reminded me of this Far Side comic. But I believe if inflation continues rising they will directly be blamed. Whereas higher interest rates they can put the blame on Russia, US, Scomo, basically anyone but themselves.
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A fly in your ointment

…silly enough to do what DLS says…

LOL, I doubt there is a such a person outside the Peoples Temple of EmBee worstshippers.

ThePensum

intervention doesn’t do anything. I don’t think the RBA has intervened since then. have a look at what BOJ is doing with the JPY now. Or the Reserve Bank of India with the INR. they just throw their reserves away.

JL2012

I think DLS could well be right……”
Historically this has proven unlikely…and a great way to lose money

JL2012

As freddy says above , there more likely to follow the fed up with another .5 , they have repeatedly said house prices arent there mandate over the years as well as “interest rates can go up as well as down”, so they have somewhat covered themselves there , inflation is very clearly in there mandate.
So much of the media seems to ignore the exchange rate aspect of imported inflation.
I think the bond markets are about right with the peak interest rate forecasts,
Nomura are now forecasting 4 to 4.5 % peak US interest rates, im guessing Aus will be a touch below that which i think is inline with historical norms and an AUD in the 65 to 75 band (cant be bothered looking it up might be wrong there)

The90kwbeast

RBA cash rate at 4% is going to be doing massive damage to house prices so that numbers seems unlikely

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