Aussie Dollar Parity: Who Really Cares?

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So much fuss was made about the Aussie dollar reaching parity, and beyond, versus the once-mighty US dollar.

In reality, parity is just another nice round number. It's something journalists and technical analysts get all excited about, just as they do when the S&P/ASX 200 approaches 4,000 or 5,000 or even 6,000, as it once gloriously did.

Dangerously, dollar parity has seemingly encouraged a whole plethora of DIY forex traders and speculators.

Making highly leveraged bets on the movement of foreign currencies has seemingly become the latest in a long line of get-rich-quick schemes to grab the attention of the Australian gambling public.

It's been a great ride, a one-way bet.

Source: Big Charts

There has been no shortage of people predicting the Aussie dollar will keep appreciating, over and above parity. First stop $1.05, then $1.10, and maybe even $1.15, over time, I can imagine them saying.

Game changer

Following the Japanese earthquake, tsunami and nuclear threat, the game might just have changed, for good.

There are stories of Japanese housewives trading foreign currency, called the Yen/Aussie dollar carry trade. Put simply, they borrow Yen at rates of say 1 or 2%, change it into the much higher yielding Aussie dollar, and Bob's your uncle.

It looks like yet another no-brainer. Japanese interest rates have been virtually zero for years, a situation seemingly unlikely to change.

In contrast, the Aussie economy is strong, and given all our lovely natural resources and China's demand for them, plus unemployment at just 5%, it was hard to see how interest rates could fall.

The goose is cooked

You know the old saying – when something looks too good to be true, it usually is. And for forex traders and speculators, the chickens may just be coming home to roost.

In just a few short days, how perceptions and predications have changed. Admittedly, we are dealing with a major dislocating event, the Japanese disaster, but there are always major dislocating events. We just don't know when they might happen.

I can't put it any better than Barry Ritholtz did in Black Swans, 100 Year Floods

The people claiming you cannot anticipate an Earthquake / Tsunami / Nuclear accident are missing the point: We can anticipate disruptive events, as they come along all too frequently in history…These occur far more regularly than most people believe:

Kass lists 16 such events in just the last 10 years, including 9/11, the GFC and the BP oil-spill. We could add the 2011 Australian floods to the list.

And when the music stops…

You get the picture. Major dislocating events come along at a pace of around 2 per year. Not every event affects markets like this Japanese earthquake has done, but that's not the point.

If you are over-leveraged, if you think you are making a one-way bet, and if you think you'll be smart enough to get out before the music stops, think again.

The odds are we'll have another "once-in-a-lifetime" event happen in 2011. It may even be happening right under our noses…as the world watches Japan, the situation in Libya and potentially other middle-east countries becomes ever more volatile.

Risk off

But back to the Aussie dollar. Where a week ago "Parity and Beyond" were the watch-words of the hoards of DIY currency speculators, we now have this from the Fairfax press…

"More de-leveraging and risk aversion means more weakness for the Australian dollar."

–       GFT Forex currency specialist Kathy Lien

"Expect further volatility in all markets."

–       Adam Parry, treasury funding dealer at Suncorp-Metway

"A week ago, virtually everybody was nearly asleep in the 99.45-102 US cent range, wondering where the catalyst for a range break would come."

–       Westpac senior currency strategist Sean Callow

The story concludes with Sean Callow saying he believes the Aussie dollar could hit 95.5 US cents in the near term, depending on the news from Japan.

Good-bye parity, good-bye speculators

Is this good-bye to parity, for good? Or is it just a natural blip in the long-term rise and rise of the Aussie economy and dollar?

I'm certainly not a currency trader, or speculator, and would never say buy or sell any currency. If I was guessing, I'd say between 85 and 95% of DIY currency traders eventually will lose money. In anyone's language, those are not favourable odds.

Parity has gone, for now. It may be gone for some time. It doesn't matter, anyway. Parity is just one more of those nice round numbers.

Does anyone remember the S&P/ASX 200 at 6,000? Me neither. Move on.

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