To hedge or not to hedge? Risks ahead for Aussie dollar

To hedge or not to hedge? Risks ahead for Aussie dollar article image

After staging a slight recovery in early July, the Australian dollar began a run of daily losses in the latter part of the month and into August, when it hit a 10-year low of 0.6673.

The steep decline was driven by a range of factors, including the lead up to the latest Federal Reserve meeting, when the market readjusted its expectations for a US rate cut.

While many had been expecting a cut of 0.50%, the Federal Reserve ultimately opted to cut by 0.25%, keeping its rate well ahead of most major economies.

Additionally, in early August President Trump escalated his trade war with China, threatening to impose a 10% tariff on the remaining US$300 billion of untaxed Chinese imports. All of these factors converged to create a fair amount of panic in currency markets.

Where to from here?

Clearly, there are still some risks remaining in the market. The Federal Reserve is expected to do just one further 0.25% cut in 2019, which is likely to keep the US dollar supported versus the AUD. There is also the risk of a global recession if no resolution is reached in the US-China trade war.

However, it is important to note that currency markets are positioned six months ahead of the economy, so the market has already priced in these risks. Therefore, while it is possible that the AUD could fall below the 0.6500 mark at some point this year, it is equally likely to regain some lost ground.

The importance of forward planning

For exporters, we recommend staying with the plan and not waiting for a further fall to hedge currency positions.

Importers who were underhedged prior to the recent falls would have sustained some losses. Rather than locking in large sums at the current rate, we recommend that importers have some hedging in place and trade little and often.

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 specialises in cross-border transactions.


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