The Australian dollar has had a strong start to the year, breaking through 0.8136 against the US dollar, its highest level since 2015 on Australia Day and since settling down to a range of between 0.80 and 0.81.
Strength in the local currency has been driven by a weaker US dollar (USD), as well as anticipation of an interest rate hike by the Reserve Bank of Australia (RBA) this year.
The greenback slid further in January after the Trump administration was seen as stepping back from the ‘strong dollar policy’ that has been in place since the 1990s. The USD fell sharply following comments from Treasury Secretary Steven Mnuchin that a weak dollar was good for US trade.
Overall, the bias for the USD seems to be down. There is speculation that the US will sell off currency to keep their rates down and the greenback is also facing competition from the Euro and GBP as the Euro region continues on the path of economic recovery.
All eyes on the RBA
Locally, market commentators are awaiting news from the Reserve Bank of Australia (RBA) next week on the potential for interest rate hikes.
Last year the RBA were very neutral in their comments around interest rates but there were a few hints that the next move would be up.
This year we expect the RBA to start to set parameters for a move, perhaps releasing the target labour market and economic data which would indicate a strengthening economy. The RBA is then likely to release further information on how many hikes they expect to make and how quickly these will occur.
To hedge or not to hedge?
In our view, there is still a strong argument for hedging the Australian dollar (AUD).
Importers will be well above their costed levels and may consider locking in some profits.
However, there is the potential for the AUD to keep going up, so importers who are hedging may want to do so with a degree of optionality.
Exporters will need to get creative to hit the target rates they are looking for, so are likely to hedge more aggressively, perhaps with a degree of optionality.
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 leading global payment and risk management solutions provider that specializes in cross-border transactions and foreign exchange services