After regaining some lost ground against the greenback in January 2019 and early February 2019, the Australian dollar fell sharply following a surprise announcement by the Reserve Bank of Australia (RBA) on February 6.
After indicating for the past year that the next interest move would be up, RBA Governor Philip Lowe said the probabilities of an upwards or downwards move were now more evenly balanced.
The AUD ended the week at 0.7088, representing a decline of 2.2% as markets priced in the probability of a rate cut.
Interest rate outlook
In AFEX’s view, it is unlikely that the RBA will cut rates any time soon. The unemployment rate is still falling and while wage growth is sluggish, it is still tracking at an almost five-year high.
The only factor that is causing some commentators to believe that rates will head lower is the fact that inflation is low, driven by falling oil prices.
However, oil prices can change quickly and the RBA may be keen to keep rates cuts for when they really need them, for example when the next global economic downturn hits.
Potential headwinds ahead
There are, however, still some other potential headwinds ahead for the AUD.
One of the biggest headwinds is that China recently returned to work after its New Year break, leaving just two weeks to finalise a trade deal with the US. Given not much has been achieved in the previous two months, it will be interesting to see how negotiations progress in such a short time period.
Another potential issue is that the US has not released any economic data for some time as a result of the government shutdown. When it does release data, this could cause larger than usual moves in the USD.
From a local perspective, the RBA has been heavily focused on wage growth numbers. The release of quarterly wage data in a week’s time will help guide any future interest rate decisions, and in turn the longer-term direction of the AUD.
Key takeouts for importers and exporters
Given the recent changes in the AUD levels, it is important for importers to consider putting hedging in place, with some optionality to prepare for a bounce in the AUD. Importers can revisit their budgeted rates to determine their gross profit margins for this financial year, as well as giving thought to their budgeted rates for the next tax year.
For exporters, many will be trading more favourably than their budgeted rates. Exporters can consider giving away some margin to stay above their costed rates, with some optionality in place to allow for a further fall in the AUD.
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 that specializes in cross-border transactions.