AUD=USD!

Fundamentals

"Parity" is the mantra for FX traders, especially when talking about the beleaguered U.S. Dollar, as several major currencies have passed or are closing in on equal weighting vs. the greenback. The latest member of this "club" comes from the land down under, as the spot Australian Dollar briefly broke above parity after the Reserve Bank of Australia (RBA) surprised many analysts and raised interest rates by 25 basis points to 4.75%. Clearly, the RBA is not concerned about deflation, unlike the Federal Reserve bank here in the states, as its economy is performing quite well, benefitting from its proximity to China as well as its role as an exporter of commodities and grains -- many of which are trading at or near multi-decade highs. This rate hike follows that of Singapore and China and demonstrates that growth prospects for the Pacific-Rim have not been overwhelmed by the shaky recovery seen in the U.S. and Europe. The wide interest rate differential between the Australian Dollar vs. the U.S. Dollar -- and even the Euro -- should make "carry trades" involving these currencies a favorite among large speculative traders such as hedge funds, as interest rate advantage plus a robust economy could propel the "Aussie" well above parity vs. the greenback in the coming months.

Trading Ideas

Given the seemingly bullish fundamentals favoring a further rise in the Australian Dollar futures, some traders may wish to explore bullish trading strategies using options on futures. One example of such a strategy would be the purchase of a bull call spread. For example, with the March Australian Dollar futures trading at 0.9826 as of this writing, one could purchase the January 1.000 calls and sell the January 1.0500 calls for about 0.0134, or $1,340 per spread, not including commissions. Premium paid would be the maximum risk on this trade, with a potential gain of $5,000 minus the premium paid, which would be realized if the March futures are trading above 1.0500 at option expiration in January.

Technicals

Looking at the daily chart for the Australian Dollar futures, we notice the stunning up-move of nearly 4000 pips since the lows were made back in October of 2008. We are now in uncharted territory, as this has been the strongest gain in the currency vs. the USD since the currency was freely floated 27-years ago. The 14-day RSI is strong, with a current reading of 63.61, but still below overbought levels. If there is a negative in the recent rise, it is that volume has been a bit lackluster, as many traders have been hesitant to add to long position with major resistance looming at parity. Support for the December futures is seen at the October 27th low of 0.9595.

Mike Zarembski, Senior Commodity Analyst