In the last month the Australian dollar (AUD) has righted itself back to a more normal trading range of 0.76 to 0.79 cents, following a two-year high of 0.811 cents against the US dollar in September this year.
In previous months the AUD was buoyed by speculation that the RBA would be hiking the cash rate and the US would hold back on any interest rate rises.
However, currently the US Federal Reserve, is set to steadily increase rates and the RBA is likely to remain on hold for longer than previously anticipated, so we are seeing the false positivity around the AUD subside.
In our view, we will remain in this range for some time and may see further downward momentum to around 0.74 cents by the end of this year.
Interest rate predictions
While the expectation was that the RBA would be signalling rate hikes this quarter, weak economic data including disappointing retail sales figures, has prompted the RBA to leave rates on hold. The RBA’s key annual meeting in December should highlight what its plans are for the year ahead.
The US Federal Reserve is generally more transparent around its communications, giving the market time to price in decisions before they happen. Currently the message is that the US Federal Reserve will hike rates once this year and three times next year, and it does appear that the market has taken this into account when determining current valuations.
To hedge or not to hedge?
Currently the AUD is on the support level of 0.7650 and if it breaks below that point, we could see it edge lower to 0.74 towards the end of this year. This would be encouraging news for exporters who have not hedged but could spell some losses for those who have.
However, our view is that the market should not become complacent on the outlook for the AUD and exporters should continue to hedge, with some optionality available.
Both the iron ore and crude oil prices are heavily pegged to the AUD. Currently the iron ore price has settled down but the crude oil price is at a two and a half year high. This could have the knock-on effect of increasing the price of other commodities, which would see the AUD move higher.
Should the RBA begin signalling interest rate hikes, this may also lead to a rebound in the AUD.
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 Account Manager at AFEX, a global payment and risk management solutions provider that specializes in cross-border transactions.