Drunk On The Dollar

Up until yesterday at least, foreign exchange traders were having a wonderful time of it.

The Aussie dollar continued its inexorable rise, comfortably topping $US1.05. Anyone for $US1.10?

But why stop there? Why not go for $US1.15 or even $US1.20?

Traders love to bet the trend. And as trends go, the “stronger for longer” Aussie dollar has been almost as good as it gets.

Apart from the wobble a month back when Japanese nuclear contamination fears were at their height, the Aussie dollar has ticked up, and up and up.

Forget all this…

Forget that the Fukushima Daiichi nuclear plant is still leaking radiation. Forget that Portugal is effectively bust, even with the €80 billion ($A110 billion) bailout by the European Union. And forget there is ongoing instability (to put it nicely) in North Africa and the Middle East, particularly Libya.

The oil price continues to soar. Gold recently set a record high. Copper is through the roof, as is iron ore, coal and most other commodities. Even the farmers are finally having a better time of things, with soft commodities like cattle, wool and grain heading for record highs.

A Whole Lotta Bull

These have been wonderful times for investors. The S&P/ASX 200 closed higher last Friday for the fourth consecutive week. Up until yesterday’s wobble, it had closed higher on 15 of the last 17 days. It’s a bull market in bull markets.

And it may have further to run. The collective market has been happy to shrug off the negatives and concerns, instead focusing on the positives.

Positives such as the continuing U.S. economic recovery, and surging Chinese export growth, rising 36% in March. Never mind such export growth could lead to increased Chinese inflation, already running above the government’s target of 4%. In fact, the Financial Times said China’s first trade deficit for 7 years “is an encouraging development for the world economy.”

Chasing the dollar higher and higher

Cue more reason to chase the Aussie dollar another few cents higher. Imagine what might have happened if Adam Scott, Jason Day or Geoff Ogilvy had won the US Masters?

I jest, of course, about the golf. But as for the dollar, with the risk trade well and truly on, just about anything has seemed possible.

It was hard to see what could de-rail this resilient market. If a massive Japanese earthquake, subsequent tsunami, including the death of up to 25,000 people, and an ongoing nuclear crisis in the world’s third biggest economy can’t do it, perhaps nothing can.

For now.

Markets work like that. They climb stairs, climb the proverbial wall of worry. But when they fall, they fall fast.

You too can find the end of the world

If you look for them, you can find plenty of doomsayers out there. They are pessimistic about just about everything, predicting in varying degrees the end of the world as we know it.

I’m an optimist, but also a realist. In times like these, the goldilocks economy can seemingly do no wrong. Risk-takers, including those forex traders using a combination of CFDs and margin to juice their returns, are having a wow of a time.

Good luck to them. If you take the risk, you deserve the reward.

But will they be skilful enough to get our before the party ends, as it surely must?

Drunk on the dollar

About the Aussie dollar, the Financial Times says…

“Short-term speculators have built up record bets on further gains in the Australian dollar, pushing the currency to fresh highs, as optimism over global growth and elevated commodity prices boost its appeal.”

When you see the words short-term and speculators, you know the party is close to ending. The punters are drunk. They’re happy, feeling great, and feeling invincible.

For investors, as opposed to the short-term speculators, it doesn’t mean you should sell up, head for the hills and await the coming market crash.

Commodities bubble? Shhhhh…

But for one, you shouldn’t be tempted to join the forex party at such a late stage. And, if you are worried about a commodities bubble, you should steer clear of that too, following the lead of

George Clapham of Arnhem Investment Management.

Clapham says in the Australian Financial Review, “he has steered his funds away from direct exposure to the resources boom because he thinks commodity prices could be nearing a peak, if they haven’t peaked already.”

Party all you like on the resources and Aussie dollar boom, but beware the warning signs. History shows that although people think they can leave the party before it ends, they don’t. Hangovers are painful, whatever the source.

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