Lately, I have been asked what appears to be a relatively simple, straight forward and reasonable question to ask – can the Aussie dollar get back to parity against the Greenback?
With the currency having traded beneath 89 cents and still closer to 90 than 100 it caught me off guard at the time. Why surely all the moons had aligned some time ago? The ship had set sail – it seemed as clear as day the strong Aussie dollar had come to an end.
Like most of the market, I was resigned to seeing the end of such exchange rates, at least for the foreseeable future anyway. I was sure we would see an exchange rate closer to 85 cents by the end of the year. A lower Aussie dollar not a higher one!
“In this age, in this country, public sentiment is everything. With it, nothing can fail; against it, nothing can succeed.” Abraham Lincoln, 1854
As I sit back and think about the information at hand at the time, and the assumptions made, it dawned on me. I got sucked in … sucked in by sentiment … how could I let this happen? I am, after all, somewhat of a contrarian by nature and have been trading markets for many years in this fashion. This time, I went against my natural instincts.
You see, as an observer of financial markets you absorb an enormous amount of information, most of it in quick time, and make decisions based on this information. Some of it is fact (e.g. data prints) or known information – some based on assumptions (e.g. interpretation of events). It is these assumptions that are at most risk of being influenced by sentiment.
A perfect example of these two dynamics at work was September’s US employment report, which showed the economy added 169,000 jobs in the non-farm sector and the unemployment rate fell from 7.4% to 7.3% – this information is based on a data set or known facts. This data, and its influence on the FOMC policy going forward, however, are open to interpretation. And this is where opinions tend to differ amongst financial market observers – and are most at risk of being influenced by sentiment.
So coming back to my point on being sucked into sentiment, like many I had believed that the course of reversing FOMC policy had already begun when in fact nothing had officially commenced. Despite being aware there was a risk, considered very small at the time, that the US would in fact not commence tapering its quantitative easing program, I chose to ignore the risk and pursue the beaten path. The rest, as they say, is history!
Well because to understand currencies you need to understand that an exchange rate is a measure of relative value as determined by market forces. The mechanics and dynamics influencing the US dollar in turn affect the Australian dollar as it is their relative value that is being traded in the market – one goes up in value, the other goes down, and vice versa.
So in order to answer the question “is parity back on the cards?” one must consider market sentiment towards both the Australian and US dollars and how this may influence the relative value over time. Based on current market psyche, one would not entirely rule out such a scenario in the future – unless of course sentiment changes again, which inevitably it will at some point.
Jim is the Asia-Pacific chief currency and payment strategist at FXR, Australia’s leading international money transfer service.
