Following a tough year for the local currency, the Australian dollar continued to fall in December 2018, closing out the year at 0.7044 against the greenback.
The AUD also had a less than stellar start to 2019, falling briefly below 0.6800 in the first week of January, its lowest level for 10 years. However, this drop seemed to be largely due to low trading volumes in the market at this time of year and it quickly regained lost ground.
The AUD is currently a couple of cents above where we started the year, while the US dollar has weakened. US Federal Reserve Chair Jerome Powell has indicated that US interest rates will remain on hold for the time being, which has taken some of the steam out of the greenback’s steady rally.
Looking forward, there are a number of upcoming events which could affect that AUD-USD currency pair.
In the US, the Government shutdown is weighing on markets, with many keen to see a swift resolution to the impasse between the Trump administration and the Senate. The US has also begun its trade talks with China and the greenback is likely to reflect the success of these negotiations.
Domestically, the Reserve Bank of Australia meeting in February following a two-month break will be an important one. The first meeting of the year typically sets the tone for the rest of the year, and markets will be watching closely for any signals that the RBA will increase interest rates following a record period on hold.
Key takeaways for importers and exporters
The 2018 falls in the AUD do appear overdone and we believe there is some upside potential for the currency this year.
However, while the sharp fall we saw in early January was an anomaly, it also serves as a warning as to what can happen in the market. For some time, 0.7000 has been seen as the worst-case scenario for the AUD but the market has shown that it can drop below that point.
Importers can therefore continue to exercise caution by hedging, with some optionality as there is the potential for the AUD to head towards 0.8000 if interest rates move higher.
The AUD is already at very good levels for exporters. We advise export businesses to take advantage of this while also preparing for a potential move higher.
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 specialising in cross-border transactions.