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Headwinds ahead for Aussie dollar

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The Australian dollar continued to track in a narrow range in May this year, as the market awaited news on Australian cash rates and Chinese manufacturing data.

So far, 2019 has seen a marked lack of volatility in the AUD/USD currency pair.

While in a typical year the AUD can be expected to trade in a 12-cent range against the USD, this year it has only tracked in a seven-cent range, between 0.7483 and 0.6738.

Therefore, in AFEX’s view we can expect to see larger swings in either direction as the year progresses.

The outlook for interest rates

Many in the market are predicting at least two rate cuts by the Reserve Bank of Australia (RBA) over the remainder of 2019, which would negatively impact the AUD.

However, another possible scenario is that the Federal Government will instead elect to increase government spending, using surging tax revenues from the resource sector.

According to the Department of Industry, Innovation and Science, Australia’s resource and energy export earnings are expected to reach a record high of $278 billion this financial year – an increase of more than $50 billion compared to the previous financial year. This is providing an opportunity for Australia to use fiscal rather than monetary policy to stimulate the economy.

US-China trade tensions

What is likely to have more of an impact on the future direction of the AUD is the outcome of the US-China trade negotiations. Escalating tensions between the two nations means there is currently no end to the trade war in sight.

As the local currency is both a general pro-growth play and a proxy for Chinese economic activity, the outlook for the AUD is likely to remain bearish until a resolution is reached.

No time for complacency

As the end of financial year approaches, both importers and exporters are currently reviewing their costed rates for the year ahead. While many were operating at costed rates of around 0.7000, the majority have recently revised this down.

For importers, they can continue to hedge, with some flexibility in place to take advantage of any recovery in the AUD.

Conversely, exporters can afford to be more aggressive with their currency strategies, taking longer term positions to maximise their returns.

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 a Senior Dealer, Fund & Institutional Sales at AFEX.  Established in 1979, AFEX is a leading global payment and risk management solutions provider specialising in cross-border transactions.

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