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Aussie dollar recovers: But for how long?

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Aussie dollar recovers: But for how long? article image

The Australian dollar (AUD) ended its prolonged downwards slide last month, reaching levels in December not seen since August 2018.

At the time of writing the dollar climbed to 0.7400 against the greenback.

The USD has fallen slightly as there is a fair degree of certainty that the US Federal Reserve is almost done with its interest rate hikes.

The market has also responded positively to news that the US will put a 90-day stay on implementing further trade tariffs against China and will try to settle differences through negotiations.

However, it is important to note that currency markets are forward-looking, so the market has already priced in a positive outcome from the US-China talks. As no deal has been settled yet, this means there could be more volatility to come.

All quiet on the home front

The majority of the major domestic “risk” events for the Australian dollar have been finalised for 2018.

Unsurprisingly, there was no rate change from the Reserve Bank of Australia in November 2018 and subdued wage growth and high levels of household debt indicates that we are unlikely to see a rate change for some time.

While many importers and exporters tend to act on any currency moves in 5 cent increments – for example when the AUD hits 0.7000 or 0.7500 – now may be a good time to capitalise on the period of relative calm in the market.

Importers may not to wait for a move to 0.7500, rather take advantage of the current rally when making trading or hedging decisions.

Exporters who have relied on booking in forward contracts in recent months, can exercise a higher degree of caution, perhaps considering some hedging to prepare for a move higher, with a degree of optionality.

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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