The latest insights from the International Monetary Fund’s (IMF) World Economic Outlook continue to point towards the possibility of a global recession in 2023, particularly as central banks tighten monetary policy to fight inflation.
While “surprisingly resilient” demand in the US has prompted the IMF to lift its 2.7% economic growth prediction to 2.9% this year, it continues to sit well below the 3.4% growth experienced across 2022.
The Reserve Bank of Australia’s (RBA) decision to raise the cash rate by 0.25% to a 10-year high of 3.35% in February, coupled with predictions of two further increases in interest rates over the coming months, is also dampening optimism for businesses looking to plan for the months ahead.
With the UK economy looking almost certain to shrink by 0.6% this year, and the US and Australia moving closer to recession, it’s important to turn our attention to what the implications of this slowing global economy will be on the Australian dollar (AUD). That allows businesses to sufficiently plan their importing and exporting activities in advance and minimise the impact on their bottom line.
For investors and businesses transferring significant sums across borders, it's important that currency risk exposure is understood. In recent months the AUD has made some significant gains, extending towards US$0.7150 briefly in late January, before falling back to US$0.69 in early February.
Continuing uncertainty in currency markets
This highlights the uncertainty that continues to impact major indices and currency markets.
Hopes central banks may be nearing the end of the aggressive monetary policy cycle have faded through the first two weeks of February, elevating demand for the USD, while raising questions around the near-term direction of the AUD.
In contrast the world’s largest exporter of goods and its second-biggest economy, China continues to reopen its borders to the world following the pandemic, helping fuel demand for risk assets, key commodities, and the AUD. This push and pull of conflicting drivers continues to create significant short term volatility, amplifying the importance of having a clear and concise FX plan.
Reaping the rewards from a stronger AUD requires regularly employing FX tools and resources when preparing business finances. These tools can help investors and businesses better manage foreign exchange transactions and protect their financial interests against inflationary pressures and volatile currency markets.
Given the recent strong performance of the AUD, businesses committed to making a payment for goods and services in the coming months could consider putting in place a Forward Contract. Forward Contracts, a hedging tool, lock in a rate for an agreed amount that can be processed anytime between two days to 12 months.
Consider setting up a target rate
Installing a rate that can be deployed for all, or even a portion of your costs across the year can help provide a protective buffer for your budget to ensure it is not severely impacted by market volatility.
Should you be uncertain about the timeline of your payments in the months ahead, consider setting up a target rate for your business to ensure you do not miss out on favourable market moves.
By setting a realistic target exchange rate for your transfer, if the rate is reached on the market, the currency is immediately bought for you, alleviating some of the heavy lifting of financial planning on your end.
Constantly monitoring rapidly moving global currency markets to secure favourable rates is likely to compound management of an already challenging business environment and take away valuable time from your day.
Our OFXperts can help you navigate foreign exchange issues and complexity to reduce exposure to currency risk at a time of slowing global economic growth.
Matt Richardson is a Senior Corporate Dealer with OFX, a publicly-listed company specialising in foreign currency exchange. Find out more about OFX’s services at www.ofx.com/en-au/
