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Aussie dollar under pressure as US-China trade war escalates

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Aussie dollar under pressure as US-China trade war escalates article image

The Australian dollar tracked in a narrow and persistently low range in August, following the steep decline it experienced in July.

This trend has continued into early September, when the AUD reached its lowest point since March 2009 at 0.6673 against the US dollar, causing widespread panic in the market.

The Reserve Bank of Australia’s (RBA) decision to leave rates on hold in September did provide some respite for the Australian dollar.

Yet despite the bounce, in AFEX’s view the dollar would need to close above the 0.6830 mark a few times for this to be considered the bottom of the market.

Outlook for the remainder of 2019

Domestically, GDP is tracking well below trend and with both the construction and retail sectors subdued, it is difficult to see where any uplift in employment would come from over the course of the rest of the year.

However, with Australia recently posting its first current account surplus in 44 years, there is potential for the Government to use this to put through some fiscal stimulus.

From a global perspective, mounting concerns about the global economy and trade disputes are likely to drive further rate cuts. The US Federal Reserve cut the cash rate for the first time in a decade in July, with more cuts expected later in the year. Similarly, the RBA is also expected to make another one or two cuts before the end of 2019.

Looking forward, we believe the future of both the domestic and global economies hang on any US-China trade negotiations, as many business and investment decisions are on hold pending the outcome of those talks.

Key out-takes

In the current environment, many importers are facing a dilemma. They can either change their costed rates, which means putting through price rises, hope that the Australian dollar recovers or take a lot of risk to get above-market rates.

The majority of exporters, however, have not seen an opportunity like this for a long time.

We recommend capitalising on this opportunity rather than waiting for rates to fall further. This is particularly the case for agricultural exporters affected by drought, who could potentially use the current levels to improve their margins.

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. www.afex.com

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