The Australian dollar (AUD) experienced sharp falls against the greenback in the second half of April and that trend has continued into May, with the local currency reaching 0.75 cents, its lowest level since June 2017.
The fall was driven by strength in the US dollar (USD), which has benefited from stronger US GDP data and higher bond yields.
May is a notoriously weak month for the AUD – in 15 of the last 20 years, the month of May has seen the AUD fall against the USD.Therefore, there is a high possibility of seeing further downside in the currency as a result of this seasonal weakness.
Currency markets will also be closely watching this week’s Federal Budget. If the Government cannot forecast a swift return to surplus, this could place Australia’s prized AAA rating into doubt, which would impact bond yields and the AUD.
Rate hike predictions
In April this year, Reserve Bank of Australia Governor Philip Lowe said a likely official interest rate hike would come as a shock to many households given there hasn’t been a lift in seven years. However, he also indicated that a hike would only happen once growth and incomes rise.
The current AUD levels are indicating a view that the RBA will not be hiking any time soon and given the relatively low levels of inflation and lower commodity prices, our view is that rates could remain on hold until next year.
Key takeouts for businesses
As mentioned previously, the historically weak month of May has the potential to drag the AUD down further. However, we are mindful that the AUD is a volatile currency and looking at the track record of recent years, we could see a sudden reversal the other way.
Any improvement in the Chinese economy, rate hike decision from the RBA or selloff in the USD is likely to lead to a change in rhetoric towards the local currency.
With the AUD at its lowest level in a year against the greenback, exporters are likely to be more proactive at locking in the AUD at these levels and less focused on hedging for further upside.
For importers, where we are now at 0.75 might feel low in the context of the last 12 months but if we look at the last two to three years, we are right in the middle of a range from 0.70 all the way up to 0.81. From these levels the AUD can come down but there is also strong potential for it to move higher.
Therefore, for importers it is even more important to have a hedge in place to protect against the risk of further downside, with some flexibility within the hedging tools to take advantage if the AUD moves higher.
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,aleading global payment and risk management solutions provider that specializes in cross-border transactions.