After a strong start to 2018 when the Australian dollar hit 0.8136 against the greenback, the AUD finished February below 0.78 and has since fallen further, as volatility and uncertainty came back into the market.
While the US was suffering growing uncertainty about its stock market, ongoing economic growth and the effect of interest rate rises, in February both the USD and AUD did the opposite of what they were expected to do.
The USD had a positive month – only its third in 12 months – while the AUD retracted as a result of increased risk aversion in local and global markets.
RBA rules out rate hikes
One of the factors that contributed to a lower AUD in February was the RBA’s rhetoric that it would likely leave rates on hold for the remainder of 2018, contrary to market predictions. RBA governor, Philip Lowe, cited lacklustre employment and wage growth data as reasons for the decision.
While the RBA maintained that its next move was still likely to be up, not down, in our view the appetite for the AUD in global currency markets will be dampened for the foreseeable future.
A recovering Euro and GBP
The local currency is also facing competition from the Euro and GBP, both of which have experienced a bull run over the last year. In 2017 the Eurozone capped off its best year of expansion in a decade, and positive data shows no sign of slowing.
Key takeouts for importers and exporters
Overall, we believe the AUD is well-valued at 0.77 cents, which is still well up on the levels we were at nine months ago.
However, currency fluctuations are notoriously hard to predict, and therefore it is important for both importers and exporters to consider a hedging strategy to protect their profit margins.
Many importers have increased their costed rates in recent months to reflect a higher AUD. Importers should therefore be protecting themselves against a fall, with some flexibility to adapt their budgets to an increase in the AUD.
Exporters, on the other hand, may want to consider having less flexibility and simply locking in the best rate they can to protect against volatility.
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 an Account Manager at AFEX, a global payment and risk management solutions specialist