2012 will mimic 2011 in Aussie dollar volatility

Philip Salter
Follow Philip
MARKETS across the globe are suddenly hinting at the promise of economic renewal. Apart from the earth successfully travelling once more around the sun, to the delight of the planet’s Homo sapiens, has anything really changed from jittery 2011?

For a short time at least, confidence is high. “Traders and investors seem prepared to take on risk again,” says Michael Derks of FX Pro. “Back in mid-December, dollar-Aussie dollar was under parity and looking quite vulnerable”, he adds, “but it has bounced back impressively since then.” Yesterday, Aussie dollar-dollar surged to $1.0384, while the euro recorded a record low of Au$1.2578 against the Aussie dollar.

The Aussie dollar – an archetype risk-on currency – is on the up, as Christmas spirits spill over into the new year. But alas, the pessimists should be equally confident in their gloom – the odds are that traders will face similar market volatility to 2011.

Derks explains that there are two global forces pushing the Aussie in opposite directions. Pushing against Aussie strength are concerns about global growth, which are encouraging investors to tread warily. Working for Aussie strength is the inability of the authorities managing major currencies to convince investors they offer a store of value – in contrast, the Australian currency is freely floating, with strong banks and a solid federal balance sheet. Alapari’s George Tchetvertakov thinks 2012 will see quantitative easing measures announced in the US, UK and Europe. If this happens, he says, commodity currencies and Scandis will appreciate strongly against dollar, euro and yen – as these will be used for funding purposes to attain a higher yield in the Australian and New Zealand dollars.

The fate of Australia’s economy, and thus its currency, is intimately tied to how fast China grows and if it crashes, how hard it comes back to earth. China grows on the iron ore, coal and copper extracted from Australia’s land. Tchetvertakov notes: “26.4 per cent of Australia’s annual exports in agricultural and manufactured products and 11.2 per cent of all its services based exports go to China.” However, whether and how hard China will crash is anyone’s guess – it would be like predicting the collapse of the Soviet Union.

Traders should expect volatile trading conditions for the Australian dollar again in 2012. Derks thinks “it would be remarkable if we did not see the Aussie below parity for some part of the year.” He says: “Apart from the slowing pace of global growth, especially in Europe and Asia, the Aussie dollar also needs to contend with a much weaker domestic economy.” Ian O'Sullivan of Spread Co thinks it is “very hard to call whether it will hold above parity by the end of the year”, but thinks we will almost certainly see a similar pattern to the last 15 months, where it swings 3 to 4 cents below parity and 6 to 10 cents above.

Derks recommends traders keep an eye on euro-Aussie dollar, which has declined 38 per cent in just three years. “It would not be surprising”, he thinks, “if this currency pair reached parity within the next couple of years.” Last year’s successful Aussie dollar traders were fleet-footed, says Derks, “the best approach was to catch one of these waves for no more than three weeks, get out completely, and wait for the trend to reverse before re-entering.” It will be a bumpy ride.