When to Convert USD to AUD

As you are all aware, if you are holding assets (all) in USD's you are heavily exposed to one ccy and the dollar in your wallet is shrinking in global purchasing power. I am keeping an eye on this chart, if/when it arrives in the .8200 to .8400 area i will begin advising US based clients to move funds from USD's into AUD's in the form of AAA Rated corporate bonds, CD's or other fixed income, where you can receive an interest rate differential of approx 4-6% over USD FI. There is high probability for gain in both exchange rate and interest rate differential for a possible 12-20% 12mo gain. It is possible AUD will be above .95 after July of next year. I am a primarily a TA, but also well understand the fundamentals and use them both in my personal trading and Fund Management. Interest rate spreads and the economic foundation support this view. I believe it is a good risk reward trade/position. Oh, one more thing. Negotiate a good spread from your bank when converting. You should pay no more that 50 ticks on exchange rate, depending on volume. Over 100K, no more than 10. Private bank, no more than 3 on cash conversion.
Good Luck,
Houdini, CTA

this is an excellent micro-level illustration of why interest rates are the predominant factor in valuing currencies.

great post houdini, welcome to FF

Thanks Merlin

Rate spreads are currently a very predominant theme in the fx market. Traders should not take the significance of this theme lightly. I have made some of my best position trades based on projections of rate spreads, which are determined by the short term econ data flow. Once you catch a sniff, let the chart help you pick your entry. Typically, the entry may feel uncomfortable, at the start, until the masses confirm it.

Houdini, CTA

yep. totally. Most pairs historically closely reflect the interest rate differentials.

i would take it even further than that - i believe interest rate expectations are the #1 factor in the value of a currency. they are the "thin slice" of currencies. ive spoken a few times of the fundies model that i use...

stronger economy > higher inflation > higher interest rates > more valuable currency

the ">" means "leads to". the further to the right in the equation, the more important to the valuation. using this model, the relevance of a strong CPI report is that it leads to higher rates, which leads to stronger currency. the inflation itself doesnt matter to the value of the currency, its only relevance is that it leads to higher rates.

and that pretty much sums up my approach to currency fundies

do you happen to have any data on this?

Hi Merlin,
I use basically the same model. This is why I recommending understanding the fundamentals to developing traders.

Last night's dovish BoE minutes were a classic example presenting a good opportunity for day trading and confirmation for position trades short GBP.
The 9-0 vote vs 6-3/7-2 expected for a 25bp cut spoke volumes for differentials, which has largely been priced in already. However, I would assume the minutes were influenced by the coordinated CB intervention - but a clear dovish skew.

EUR IFO 20 month low was also a confirmation as USD picks up tempo.

I will update the chart on this thread as price movement permits to hone in on the trading decisions for this longer term view. Now, we just wait to see how things unfold. We are in very interesting times, indeed and i speculate beyond the short term with caution.

Side note, I've found an Oz bank offering 7.6% 90day CD's. That's tempting to start moving into the position, but i'm waiting on price to drop further - AUD/USD 83.30 area is likely place for a bounce.

Houdini, CTA

wow thats damn good! a heck of a lot better than the measly 3.X% im getting on my tbills

if you dont mind dropping me an email with some details, i would much appriciate it

Gentlemen,

Try www.asx.com.au, look on the left hand side, for a link 'interest rate securities'. There are listed securities, like corporate bonds, convertible notes, hybrids, some earning 10% +.

It's not uncommon to see banks here with 7.6% or more on term deposits (cd's). There are also unlisted debentures, secured and unsecured, anywhere from 7.6 - 9.5% from what I've seen lately. Check out www.infochoice.com.au

And if you need a man here on the ground to execute for you let me know. I'm in Brisbane.

The Top Bloke

Top Bloke thanks very much for the info! australia is looking like a great place to put some savings right now, ive been looking into it ever since Houdini brought it up. the only thing im worried about is my feeling that the dollar will strengthen, i may get a great rate in australia but im worried my funds might weaken. im looking for a clean hedge to make this work. btw, dont be surprised if i take you up on that "man on the ground" offer

Hi Merlin,

Currently, I'm looking for AUD to weaken further against USD . If you want, I will let you know when I begin to make moves and can post a chart.

This week i will be looking for hints of market sentiment on the fundamental front. If USD rallies Q1-2, as i suspect, this trade could set up nicely per chart. I will be accummulating in traunches to balance acquisition price. The further it falls, the more risk friendly. AUD, JPY, CHF could be top performers this year, and Gold (and Silver), of course.

Houdini, CTA

I'm happy to help, just let me know when you're ready.

Also, I'll see if I can post a detailed news article/report on forexfactory about Australia & AUD so you can get even better insight into the place.

thanks for the help gentlemen!

houdini, you said that you are trading around the position... what exactly are you doing?? my thought was that i convert my dollars to australian dollars, buy the aussie bonds, then sell rallies in AUDUSD to hedge against my aussie dollars getting weaker. is this the kind of strategy you are using?

houdini, you said that you are trading around the position... what exactly are you doing??


Hi Merlin

Don't know in what context you're referring. I don't see the quote in previous posts. In such a scenario, i will manage it independent of other trades of the same currency.

Houdini, CTA

HI Merlin,

There were fundamental shifts following the posting. I was forced to raise some entries modestly, but the retrace was shallow. I only got into 40-50% traunches and have carried it, since. Oh well, can't win them all, but got half. Now the key is taking some out, which i will begin to do shortly, but not more than 50% of holdings.

I've been looking for an MT4 indicator that will plot selected econometric values (e.g. GDP, CPI, Home Sales, etc) along the bottom of an MT4 chart. I gather that many traders here trade on shorter time frames, but long-term planning like we see in this thread would be greatly aided by such an indicator. Has anyone seen something like this? If not, perhaps the creation of one is in order... I recently purchased a subscription to Economagic... maybe I can set up an indicator that will read the values real-time and auto-update as necessary. But I would much prefer it if one already existed

I swear I saw something like that a while ago - an indicator that uses data from the FF calendar, but my searches so far have been fruitless. I'll have another go at it once I recover from the weekend.

I think this is what you are looking for:

http://www.forexfactory.com/showthread.php?p=208242

That's it. I haven't tried it myself but I think you may be able to use "News.csv" to plot whichever report you want against time, or if not, then get in touch with Hanover to give you a hand. He seems like a very intelligent and helpful chap.

Hi Merlin, Sorry, i missed your january post and did not reply. I buy AUD's mainly in the form of fixed income, but may leverage into the assets. The fixed income may contain modest risk, depending if you go corporate AAA's or Gov bonds etc.

After this weeks strong PPI and CPI, I have sold a portion into the rally and may buy back again later. I anticipate that AUD rally is not over.

Fella's, I commend you on your search for a guide around econometric values and let me know what you come up with. I'd be interested in observing how it responds weighed against a human view.