The Aussie dollar resumed its downward trend last month after two back-to-back months of gains, hitting a low of 0.6751.
The currency fell more than 1 US cent over the month as a barrage of disappointing economic news out of Australia and China worked against it.
Australia shed jobs for the first time in three years, pushing the unemployment rate higher, while wages growth remained weak and retail sales missed expectations.
Meanwhile, a large release of Chinese data including industrial production showed the economy of Australia’s biggest trading partner continuing to soften as the trade standoff between China and the US showed no sign of progress.
Risks mount as we head into year end
Markets are now focused on the US Federal Open Market Committee meeting this week when the Federal Reserve will release its dot plot, illustrating where each member expects interest rates to be at the end of 2019, 2020 and 2021. A hawkish dot plot could boost the US dollar, pushing the AUD down.
Next in focus will be the European Central Bank meeting where President Christine Lagarde’s forecasts for the Eurozone economy could put downward pressure on the EUR/USD, ultimately fuelling US dollar strength and weighing on the AUD/USD.
Another potential catalyst this week is the UK election. The pound has strengthened in the leadup to the election and looks set for a drop in the wake of the event regardless of the outcome. In a typical buy-the-rumour sell-the-fact reaction, many will seek to lock in profits by selling the pound before the focus returns to Brexit. A drop in the pound would see the US dollar strengthen, which would put the AUD/USD under pressure.
The only major data point due out in Australia before the end of the year is next week’s employment report. The report has missed expectations for four of the last seven releases, and another disappointing result could send the AUD lower.
Prepare for a further fall, but start to get ready for the rebound
The combination local and offshore headwinds suggest the currency could fall further. However, over the longer term, there is potential for a recovery in 2020 especially if the housing market continues to recover.
In this context, exporters, many of whom are well ahead of budget this year, might consider becoming more aggressive with their hedging policy by taking a lot more optionality, which, whilst more expensive, will assist if this downtrend continues.
Importers could consider continuing to hedge at these levels and prepare for a potential further 3-4 US cent fall in the currency over the next three to four months, while also building in some flexibility so that if the Australian dollar does snap back next year, they can ride the upside and aren’t caught with rates behind their competitors.
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 that specialises in cross-border transactions.