A new financial year is always a good time for businesses to review their foreign exchange strategy as currency fluctuations can have a major impact on your bottom line.
In 2018-19, the Australian dollar experienced a steady decline against the US dollar, falling from highs of 0.7483 in July 2018 to 0.6738 in May this year, due to concerns about both domestic and global growth. For many importers, this decline has had a negative impact on profitability.
With further potential headwinds for the Australian dollar, businesses should approach their currency strategy with caution.
In May the Reserve Bank of Australia (RBA) surprised the market by electing to keep interest rates on hold despite weak domestic economic data, which showed Australia’s economy grew just 1 per cent year on year in the second half of 2018.
It did cut the rate in early June, and again in July to a flat 1 per cent. As Australians continue to feel the slowdown of the housing market and stagnant wage growth, market commentators are predicting a further cut to 0.75 by year’s end, and potentially again by end of Q1 2020.
If they eventuate, the cuts will further widen the interest rate differential between Australia and the US, which is currently 1.5 per cent.
A likely knock-on effect would be a sell-off in the Australian dollar as investors and currency traders look to more safe haven economies for their sources of return.
Impact of China
Another risk factor for the Australian dollar is the performance of China’s economy, which in recent months has been impacted by ongoing US-China trade talks.
A third of Australian exports are shipped to China, which means the Australia dollar is often viewed as a proxy for Chinese economic activity.
Although talks have resumed, there are continuing trade tensions and a number of commentators are currently revising down their predictions for China’s economy in 2019 and 2020.
With this month revealing the Chinese economy has grown at its slowest pace (6.2 per cent year on year) since the first quarter of 1992, it’s likely to weigh on the Australian dollar if it continues.
Strong commodity prices have continued to support the Australian dollar. In May, iron ore broke through the $100-a-tonne level for the first time since May 2014 and Australia’s major oil companies are also benefiting from a US crackdown on buyers of Iranian oil.
As West Australians we know the price of resources can be volatile and vulnerable to global supply shocks, and any future downturn in resource prices would impact the Australian dollar.
In AFEX’s view, despite the narrow range of the Australian dollar in recent months, this is not a time to be complacent given the risks for the local currency.
For many importers, many of whom are operating at costed rates of around 0.7000, having a currency hedging strategy in place can prepare for a move lower, with some flexibility to allow for future bounces in the Australian dollar.
Exporters and offshore earners, on the other hand, can continue to capitalise on the Australian dollar’s current levels, taking longer-term positions to maximise their returns.
Of course, currency markets are full of risks and opportunities for trading SMEs and corporations.
Therefore, AFEX’s senior business consultants Bryan Quinn (0481 267 338) and Nicole Hitch (0422 593 447) are offering CCIWA Members a free consultation to discuss the current FX market and analysis and insights for your industry.
For more information visit afex.com.