With commodities being at its all-time high due to the ongoing crisis between Ukraine and Russia, the Australian dollar is a standout opportunity for traders, says City Index senior market analyst Tony Sycamore.
He explains that traditionally, the Australian dollar is referred to as a risk currency that has rallied and fallen in line with risk assets, including US equities. This, however, is no longer the case due to the skyrocketing commodity prices.
“Australia’s terms of trade is now at the highest level we have seen since the Global Financial Crisis. Back then, the highs were pinpointed by the fact that when China turned on the monetary policy and fiscal stimulus taps, a lot of that money washed ashore in Australia. The Chinese fiscal fuelled demand for commodities, leading the Australian dollar to rise dramatically against the US dollar at A$1.1081 in July 2011,” says Sycamore.
As the terms of trade shock continues to permeate through the Australian dollar, Sycamore says the firm continues to be bullish on the currency, expecting it to trade up towards 75.5 Australian cents in the short term. “In the longer term, I look for it to push up towards 77 Australian cents. But in the grand scheme of things, it is still comparatively cheap with where commodity prices are. So I believe there is still some good upside for the Australian dollar.”
Another asset class that presents good opportunities for investors and traders alike is gold, says Sycamore. The yellow metal rallied to an all-time high since August 2020 on March 8 when it traded at US$2,075 per ounce, about 12% increase year-to-date. A dramatic reversal, however, took place in early March when peace talks started to emerge from the crisis between Russia and Ukraine.
Despite this, the firm continues to be bullish on gold as a hedging tool against inflation, devaluation of fiat currency and equity market volatility. “What has come to light more recently is that we have seen through the sanctions imposed on Russia, that assets or reserves can be frozen.
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“Russia president Vladimir Putin thought he had this huge war chest sitting that he could tap into. But when the West froze that, it suddenly became apparent to a lot of other autocratic countries — be it China, Nicaragua, Iran or Venezuela — that their reserves could be frozen. This puts gold into a new light,” says Sycamore.
Leveraging market volatility with CFDs
After two years of the Covid-19 pandemic, the start of 2022 was not as sedate as some investors may have wanted it to be, says Sycamore. Reasons behind the eventful year include the US Federal Reserve and the G3 central banks becoming more hawkish towards the end of last year, as they were compelled to respond to the surging inflation.
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As the war in the Black Sea region could extend until the year of the year, Sycamore suggests traders to reduce their position sizes, bearing in mind that volatility has dropped in recent weeks. “I believe there are still some very good opportunities, but it is certainly a situation where I advise reducing position sizes, managing risk and trading around the edges rather than getting caught in that chop in the middle,” he says.
To capture the opportunities and take advantage of the ongoing volatility, an attractive tool that traders and investors alike could capitalise on is contracts for differences (CFDs), says Sycamore.
“With CFDs, traders have the ability to profit in the bull and bear market as they can go both long and short. The transaction costs are also extremely low compared to buying physical shares, so stock investors are able to do it more cost-effectively through CFDs at spreads that are very tight compared to competing products such as leveraged exchange-traded funds,” says Sycamore.
City Index, part of the StoneX Group, offers more than 6,000 markets for CFDs and foreign exchange (forex). Providing traders with sophisticated trading tools ranging from technical analysis applications to performance analytical tools powered by artificial intelligence, City Index is able to help traders reduce bias and help them to establish good trading habits.
Photo: StoneX and City Index
