A bit over three years ago I decided to short the Aussie dollar. I went into it thinking that it’d be a decent money spinner. And eventually, it was. But I failed to capitalise. With zero money to show, all I can say is that I’m at least a little more learned for my troubles.
The ‘investment’ was a punt to profit from an economy that had (and still has) plenty of downside risk. Non-existent wage growth (for over a decade now), world beating private debt burden, a rapidly unwinding commodity boom, and an economy far too reliant on the populous buying and selling homes from and to each other, seemed to all add up to a negative outlook.
But I don’t think I really considered just how well Australia could tread water. In hindsight, a pretty naïve viewpoint given the entire political/business/economic infrastructure is geared towards keeping this bubble inflated for as long as possible.
The initial position I opened was when the AUD to USD exchange rate was about 76 cents. I sold the equivalent of AUD 200,000 and simultaneously bought USD 152,000.
200,000 might sound like a lot. And it is! But in forex, the contract size is kind of immaterial. With margin, you only need a fraction of the entire contract size, and so for my trade, $2,000 (i.e. 1% of the position) was sufficient.
With that amount of leverage, changes in the value of your account can happen quick. For example, if the AUDUSD exchange rate moved to 76.5 cents (the AUD appreciates), the USD 152,000 is still the same, but it’s now only worth about AUD 198,700. The 0.5 cent appreciation in the exchange rate means losing AUD $1,300. For this reason, you want a bit of a safety buffer. E.g. instead of only having $2,000 in your account, $10,000 means the exchange rate can move quite a bit against you before you get margin called. Still means you lose a lot of money though.
I had always intended to hold the position for the long-term or until facts/things change. When I first entered the trade, the exchange rate proceeded to drop to 75 cents. Pretty great to be up early.
But in short shrift, the Aussie reversed and moved beyond 77 cents. Damn.
With the higher exchange rate, I actually wasn’t too worried and saw it as an additional selling opportunity. I increased my position size by another AUD 50,000 at about 77.5 cents.
The AUD then kept moving against me. Kind of annoying, but I just rationalised that it was a great spot to keep increasing my position.
For all my calculations on how much I’d be willing to lose, I don’t think I had adequately accounted for just how much of a psychological weight it would be to be to be down such a significant amount of coin.
At about the 81 cent level, I decided to eat part of the (significant) losses and downsize my position. It was definitely a miscalculation in terms of how much I was willing to lose. Not so much financially, but psychologically; I just wasn’t prepared to keep seeing my account size dwindle as the AUD kept appreciating to who-knows-what??
…But as is often the case with these types of things, almost as soon as I downsized my position the AUD rally was effectively over.
Since that high point of about 81 in late 2017, the AUD has remained stubbornly strong. But it (very) gradually fell to the mid-70s and eventually into the high-60s by the time I arrived in Japan in November, 2019.
Having downsized my position to just under AUD 200k, the breakeven point of my trade was no longer 76 cents. It was about 74.5 cents (owing to the fact that my position size was larger on the way up, and smaller on the way down).
But 74.5 cents isn’t really the breakeven. For every day I held the position, I had to pay the differential in interest rates of the US FED and Australian RBA plus a small commission. Those small costs add up over time, and are equivalent to be about 1.5 cents of exchange rate movement per annum. So, after year 1 breakeven moved from 74.5 to 73, and then down to 71.5 after year 2, etc.
Anyway, at the beginning of 2020, I was up. Not a stupendous amount, but not bad. But I had definitely paid less and less attention to it. The position was just sitting there, ticking away. I had thought to increase the size at a few points, but neglected to. Plus, being in Japan, I was adding to my AUD short position via saving yen.
But then everything kind of went crazy. COVID.
Risk off was definitely an understatement. Money was flowing from all corners of the world back to the relative safe haven of the US. In an incredibly short span of time, the AUD moved from the high- to mid-60s, to the low-60s, crashed through into the 50s and looked like it would basically fall forever.
It went all the way down to 55 cents (briefly), and I was up big. But, I didn’t exit. Why exit if it’s going to keep falling, right?
On the subsequent rally, there was always an excellent chance that COVID could kick off again, and that the AUD would start tumbling down again, way past that 55 cent recent low. But, no.
I had first thought to exit around the mid-60s on its way back up, but still thought that there was an excellent chance the AUD could turn south. Not to be, though. The virus is still wreaking havoc, but the amount of central bank and government stimulus has meant that markets have almost all miraculously recovered (at least for the short-term).
I was still pondering whether to exit the trade. And I finally did when the Reserve Bank released a statement saying that they, unlike all other central banks, would not do anything akin to quantitative easing. The scarcity of the AUD (relative to other money printing crazed central banks) combined with a large amount of China stimulus to buy Aussie Iron ore, meant that the AUD was primed to take-off.
With my trading ego shattered, I closed the trade about 6 weeks ago when the exchange rate was at about 71 cents. Since then, it has rallied to over 74 cents (vindication), but has since fallen back to the 70s. It was actually a relief more than anything to exit the trade. For my 3 years of trouble, my account was up about 100 bucks. Ha, slightly better than a mattress. Needless to say though, my account was a lot larger when the exchange rate was in the 50s!
I’m open to opening the position again. Nothing has really changed about the Australian economy, and so I still think the AUDUSD is headed down over the long-term. But for the minute, the COVID shock will be the most influential factor, and it’s hard to know how things will play out. So, I’m staying out. At least out of forex anyway.
In Japan times, work was actually pretty busy up until a few weeks ago. But I then took a bit over a week off and cycled round Lake Biwa near Kyoto. The weather was actually pretty rubbish, but decent enough for clear riding on a couple of days. I pulled the plug on going the whole way though, once the rain started to plummet.
Unfortunately, no camera. I was trying to travel as light as possible, and with most things I was carrying in a back pack, it wasn’t super waterproof. Really need to get some sort of rack/bag solution, because my shoulders were destroyed after multiple days in the saddle. Despite less than ideal conditions and set-up, it was actually super cool. Some amazing country side that I’m keen to go back and see more of.
The bike has definitely been great to explore Tokyo with, but it’s really only now that the weather is conducive. August and most of September were ridiculous in terms of heat. Couldn’t go anywhere without quickly being drenched in sweat. Right now though, perfect. Will make the most of it before the snow starts to fall. And then make the most of that, too!