Since July the Australian dollar (AUD) has remained strong ranging between 0.7600 and 0.8066 US cents.
Throughout August, it steadied to a tight band between 0.7850 and 0.7950, potentially giving Australian small and medium-sized enterprises (SMEs) traders a false sense of market normality.
The market has not traded at these highs since the beginning of 2015, so we can expect some volatility to return to the market.
Whilst we see the AUD topped out at 0.80 cents at present, we encourage SMEs to consider the impacts of impending market events on their currency risk management strategy.
The Reserve Bank of Australia has subtly increased warnings about the AUD’s strength following recent sustained heights. The Reserve Bank of Australia stated they would like to see the AUD remain below 80 US cents, as market levels above this puts downward pressure on inflation and hampers future economic growth locally.
The last time the RBA raised interest rates occurred in 2010 during prevalent inflation, booming mining and high commodity prices. Fast forward to now and inflation remains around 2% and commodity prices are generally subdued, so we do not expect interest rates in Australia to rise until middle to late 2018.
As the market readies for tightening, we may expect this to potentially drive the AUD higher.
The longer the AUD stays in the high 70s, the greater the chance it will trend lower – as long as the USD does not continue to weaken further. There are several developments that point to the strong possibility of a lower USD by the end of 2017.
Commencing in September, expected from September this year, the Federal Reserve will start to reduce the USD 4.5 trillion balance sheet very slowly to reduce the outcomes of repeated quantitative easing activity. The chance of a Federal Reserve interest rate hike in December this year has dramatically dropped from 75% to 48% on the Bloomberg Poll, and economists across the board are predicting a dial back on the expected increase path due to Trump’s lack of legislative action.
While the USD would typically strengthen when interest rates are set to increase, a hike has been predicted for so long that the lack of follow through has actually weakened the USD. The Trump administration also wants to see a lower USD, so we expect levels to remain under downward pressure as geopolitical concerns remain ongoing.
In addition, the EUR strengthened hugely against the USD since May this year from lows of 1.04 to highs just above 1.19, a phenomenon not seen since 2014. The EUR/USD is the largest traded currency pair, and has appreciated 12% so far in 2017. It has hovered around 1.17 during August this year, and if this level of strength continues, we may see the USD weaken further against the basket of major currencies.
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.
Marc Lim is sales manager at AFEX, a leading global payment and risk management solutions provider specializing in cross-border transactions