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Aussie dollar: Be prepared for bumpy ride

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Between October 4-October 31, the Australian dollar maintained a narrow range of between 0.7118 and 0.7159.

As we entered November 2018, the local currency delivered its strongest gain against the greenback since March 2017, adding 150 points.

The rally was driven by a number of factors, including positive Australian trade surplus figures and a tweet from US President Donald Trump, which signalled optimism about the US-China trade negotiations. This saw a strong bounce in the yuan, which the AUD closely followed.

However, the gains were short-lived, and within days the AUD had lost 50 points. This signals the need for caution, as there is clearly a lack of demand for the dollar at higher levels in the current market.

End of the growth cycle

It is clear is that the local currency remains unpredictable. While it may look poised to rally, there are no guarantees that after losing 14% this year, it may continue to fall in 2019.

We are currently nearing the end of the global growth cycle, with a potential downturn on the cards. This has historically been detrimental to AUD levels as investors flock to “safe-haven” currencies. It is therefore important for SMEs to prepare for a move in either direction.

For importers, we recommend being realistic about the levels that are achievable in the current market and implementing some hedging, with a degree of optionality to capitalise on any further bounces.

On the export side we recommend taking advantage of the current levels to lock in forward contracts, rather than relying on a move lower to maximise profits.

Consult the experts

The currency markets are full of risks and opportunities for trading SMEs. Managing these risks and trying to predict market movements can be complex and a distraction from day-to-day business activity.

It’s best to consult with a foreign exchange provider throughout the year who understands your industry and can provide relevant currency market insights and analysis, as well as gauge what market shocks may be around the corner.

James Swerling is Account Manager at AFEX,  a leading global payment and risk management solutions provider that specializes in cross-border transactions

www.afex.com

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