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Uncertain times ahead for Aussie dollar: Is it time to hedge?

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The Reserve Bank of Australia’s (RBA) announcement in early February this year, that it would not rule out interest rates cuts led to subdued performance for the Australian dollar over the month.

The local currency has also been dampened by recently released GDP data, which shows the economy grew by just 0.5% in the second half of 2018.

Given the RBA has predicted GDP growth of 3% for 2019, market commentators have been speculating about where any uplift in growth would come from, with many of the view that rate cuts are looking increasingly likely.

A slowing Chinese economy

Many of the RBA’s decisions are linked to both Chinese monetary policy and Chinese wholesale inflation, which acts as a barometer for the global demand for goods.

In early March this year, China released monetary growth data which undershot market expectations. There are signs that China will step up monetary and fiscal support of its slowing economy throughout 2019.

Further, Chinese wholesale inflation is falling, indicating that the global demand for goods is dropping off. This may lead to reduced demand for Australia’s raw materials and a drop in commodity prices, which have previously provided some support for the Australian dollar (AUD) against the US dollar (USD).

Key takeouts for importers and exporters

With both local and global headwinds at play, SMEs should adhere to their hedging policies.

The AUD has been trading in a narrow range of 0.6900 to 0.7200 against the greenback for some time but this is unlikely to persist over the longer term.

Current market conditions suggest the AUD still has the potential to fall further. Conversely, there is also the possibility of a recovery later in 2019.

For importers, hedging remains important but with more flexibility than usual to take advantage of any move higher.

Exporters can afford to be slightly more aggressive with their hedging policies, as many will have some buffer in their costed rates. This provides the opportunity for exporters to benefit from even greater outperformance if the AUD moves even lower.

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. www.afex.com

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