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Aussie dollar: To hedge or not to hedge?

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Aussie dollar: To hedge or not to hedge? article image

July 2018 marked a fairly uneventful month for the AUD/USD currency pair, with the AUD continuing to track around the 0.7400 range against the greenback.

Interestingly, it was the smallest monthly trading range the market has seen for four years, with movements of only 2.3%, compared to 4.8% in June 2018.

Historically, such quiet months have been followed by much larger swings. In August 2014, for instance, the trading range of the AUD/USD was a mere 1.5%. This was followed by a range of 8% in the month that followed.

Where to next?

If historical data is any indication, the current lull in the market may be unlikely to continue, and looking ahead, there are signs that the AUD could be due for a recovery. In recent weeks we have seen the release of strong GDP and employment data, inflation was 2.1% in the year to June 2018 (up from 1.9% in the year to March 2018) and commodity prices remain high.

However, some risks remain for the local currency. The US economy keeps surprising to the upside, with expectations that the gap between the Australian and US cash rates will continue to widen. Further, concerns about a US-China trade war may keep the AUD subdued.

The case for hedging

For both importers and exporters, it is important to be prepared for any eventuality by having the right instruments in place.

Many importers are currently hedging the AUD against the USD, with some optionality in place to provide protection in the case of an AUD bounce.

Exporters who have not already done so should consider locking in forward orders to take advantage of the weaker AUD, with some hedging in place to prepare for a higher AUD.

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 an 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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