The Australian dollar (AUD) has staged a prolonged recovery against the US dollar (USD) since March, when it reached an18-year low of US$0.55.
The volume of money being printed in March, particularly by the US Federal Reserve, led to a mass liquidation of assets and a flight to quality globally. US Treasuries were a beneficiary, which meant demand for the US dollar was high.
However, while the downturn in the AUD was fast, its recovery has also been swift. In early June, we temporarily saw the AUD break through the US$0.70 mark.
The volume of liquidity in the market has helped to reinflate local share and currency markets. There are also signs that retail sales and credit card spending are recovering, which is likely to be supportive of the broader economy.
Australia is also benefiting from a recovery in China, where domestic consumption and export demand have been bouncing back.
In comparison to Australia, the US economy is structurally less sound, with more corporate and financial distress. Many US consumers do not have the savings to weather a downturn and the fact that the economy is built on high government, corporate, and individual debt is also weighing on confidence.
Expect more volatility
Looking forward, we believe the AUD should continue to hold steady against the USD. The Reserve Bank of Australia has consistently reinforced the message that it will not lower interest rates further or increase rates for the foreseeable future which has helped to create confidence in the local currency.
However, it is important to note that market volatility is likely to remain high, which means things can change quickly.
As an example, during the Global Financial Crisis, the AUD rapidly moved from US$0.98 to US$0.60 and back up to over US$0.90 in a relatively short period of time.
In volatile times, smaller events can also have a much larger impact on markets than they normally would have. The 2011 earthquake in Japan, for instance, caused significant instability in global currency markets. It is therefore important for Australian businesses, particularly small and medium-sized business (SMEs), to be prepared.
Key takeaways for importer and exporter SMEs
When markets are volatile, it can be tempting to try to guess what the market will do. However, this can also lead to irrational and expensive decisions.
The businesses we have seen do well in these changed market conditions are those that have been systematically hedging their currency exposures, with some optionality and flexibility.
Our advice is that businesses should hedge according to their business needs today, with flexibility to take advantage of further changes in the AUD in the months ahead.
James Swerling is Senior Dealer, Fund & Institutional Sales at AFEX, a leading global payment and risk management solutions provider that specialises in cross-border transactions. www.afex.com