The beaten down Australian dollar experienced a rally in October, hitting a high of 0.6924 cents against the US dollar at the latter end of the month.
This has created some optimism in the market, though there are still question marks over whether this strength will remain.
Much is hinging on the outcome of trade negotiations between the US and China. Market experts expect an initial deal in two weeks but if that is delayed or the two sides cannot agree to hold off on the tariffs which are due in December, the outlook for the AUD will remain weak.
Rate cut off the cards for now
Another key driver of currency fluctuations is interest rates.
As we entered November, the Reserve Bank of Australia opted to keep interest rates on hold. While economic data remains weaker than normal, there has been little change in the outlook from three months ago.
The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of low wage growth weighing on consumer spending. The RBA will therefore be closely watching retail sales data over the Christmas period, and may decide to cut rates further in February.
In the US, unemployment remains low, household spending has been growing strongly and the services sector has exceeded growth expectations.
However, business investments and exports are weak and inflation is below expectations, which drove the Federal Reserve’s decision to cut rates for the third time this year at the end of October.
Take advantage of current levels
With a number of potential risks on the horizon that could affect the AUD-USD currency pairing, importers can take advantage of the stronger AUD to implement some genuine hedging. For the majority of larger firms, 0.6900 is above costed rates.
While the position for exporters is not quite as favourable as it was, Australian exporters are still competitive when compared to the rest of the world and businesses can continue to benefit from current levels.
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