After a prolonged downward slide against the greenback for most of 2019, June was a positive month for the Australian dollar, which reached a high of 0.7023 over the month.
The AUD was supported by a range of factors. Despite the Reserve Bank of Australia (RBA) opting to cut the cash rate by 0.25% at the start of the June, this was counterbalanced by rising odds that the US will kick off a cycle of cutting by lowering its rates by 0.50% in July.
The local currency was also buoyed by strong iron ore prices, which at $125 per tonne are exceeding expectations.
In addition, there is increased optimism about the US-China trade negotiations, which have weighed on the AUD this year. There are now indications that talks will recommence, though we are still a long way from a resolution.
Australian economy faring well
Despite the fact that the RBA has now cut rates over two consecutive months, in our view the Australian economy overall is performing quite strongly.
Surging commodity prices and a weaker AUD helped to lift Australia’s trade surplus to a record $5.745 billion in May. And while inflation is low, we expect that the recent cuts to the cash rate, along with anticipated cuts in November and February, will get inflation levels back to the RBA’s target levels of 2-3%.
Take advantage of current levels
For importers, they may take advantage of the AUD’s current levels. It is important to remember that a good news rally can fade, for example if the US/ China trade talks are again derailed.
We are also about to go into a soft few weeks for currency markets as the US and Europe prepare for their summer holidays. The lower trading volumes at these times can mean any negative market news can create a storm in a teacup and with it, currency market volatility.
Exporters would be aware that prices are relatively high in US dollar terms. Therefore, exporters may continue to hedge as normal.
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 Senior Dealer, Fund & Institutional Sales at AFEX, a leading global payment and risk management solutions provider specialising in cross-border transactions.