August was a difficult month for Australian dollar (AUD), which closed out the month at 0.7261 against the US dollar.
The local currency has continued its downward slide into September, reaching 20-month lows.
A number of factors weighed on the market. Firstly, a number of major banks increased their mortgage lending rates, with signals that many others could be set to follow.
Many major banks also have significant interest-only lending books which are due to expire, converting into principal and interest. This will mean many property investors will be faced with paying more or having to sell.
Economic data from Australia has been lacklustre, with CAPEX figures showing Australian business investment fell sharply in the June quarter. In addition, retail sales figures also showed a drop off in discretionary spending.
Adding to the downward pressure was the ongoing trade discussion between the US and China and the fact that the US and Canada ended their negotiations without reaching a trade deal.
In more positive news, commodity prices are still high despite the lower AUD. Oil is currently sitting at around US$70 per barrel. Should local economic data turn around, strong commodity prices could help to drive the local currency higher.
The outlook for the remainder of 2018
We are coming into what has historically been a volatile time of the year for currency markets. Therefore, we could see the AUD fall below 0.7000 and go above 0.7500. Many of our clients have been taking advantage of the fact that options are cheaper when volatility is low but that will change when the swings in the market increase.
We have noticed that many of our clients are already well hedged. For those who are not, it is important to have some hedging in place.
For importers, we advise being realistic about what costed levels should be, perhaps trimming them back and having plenty of optionality in place.
Exporters can afford to be more conservative and perhaps put in some forward contracts. The last time the AUD did come this low, we saw it recover quite quickly, so we recommend exporters take advantage of the current levels.
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 Account Manager at AFEX a leading global payment and risk management solutions provider that specialises in cross-border transactions