AUD: Volatility set to continue as pressure to cut rates increases

The Australian dollar has been hypersensitive over the past quarter, making it more difficult for businesses with commitments overseas to know how best to use a currency plan to their advantage.

Economic weakness continues

Various data measures released throughout the quarter furthered the view that weakness in the Australian economy looks set to continue. While data points across the manufacturing and services sectors both rebounded from previous reads, outcomes in the construction industry were viewed more positively.

In a narrative broadly supported by the Reserve Bank of Australia (RBA) which released minutes from its most recent monetary policy meeting in September, business conditions do remain benign particularly for those businesses exposed to global trade tensions. Meanwhile more domestically-focused sectors have been somewhat insulated and supported by signs of robust employment.

US-China trade war still a key factor

The Australian dollar, already faced with a structural decline versus the US dollar, has continued to suffer at the hands of the US-China trade debate. Deeply leveraged to the economic success of China’s export heavy economy, trade headlines have been the single biggest source of currency volatility over the course of the past quarter.

Michael Judge, Head of Australia and New Zealand at OFX, said: “Sentiment surrounding the debate has promoted a move away from riskier assets, currencies such as the Australian dollar have borne the brunt. We find ourselves at a complex juncture with some respite likely should the narrative tilt in favour of a nearer-term trade solution.”

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US Federal Reserve cuts

The US Federal Reserve’s decision to cut interest rates by 25 basis points in September came as no surprise, as markets had largely factored this anticipated move into pricing. The Australian dollar would have normally been expected to rise against the US dollar on the move. But instead of gaining, it weakened with the Australian dollar falling slightly on the day to a low of 0.6850 (September 18). Against other major pairs the Australian dollar performance could also be described as lacklustre.

“Sentiment surrounding the debate has promoted a move away from riskier assets, currencies such as the Australian dollar have borne the brunt.” – Michael Judge, Head of Australia and New Zealand at OFX

What does currency volatility mean for my business?

Volatility creates risks but equally opportunity. Working with a currency expert can help businesses manage uncertainty during times when exchange rates are fluctuating heavily. For example, with the use of a Forward Contract you can secure a rate for up to 12 months in the future.

Transferring from Australian dollars to US

For example, if you’re in Australia and you need to buy goods from America valued at US$10,000, the difference between buying US dollars in July versus a few weeks later could have been costly. On July 4, the purchase would have cost AU$14,285.71. On September 2, it could have cost AU$14,925.37, an additional AU$639.66.* If you had to make these transfers monthly and made the same loss, you would have paid an additional AU$7,675.92 over the year. For most businesses this is not a cost that can be passed onto the customer or easily absorbed.

AUD USD

Transferring from Australian dollars to pounds

The picture is similar if you look at Australian dollar to pound transactions. On July 23, one Australian dollar cost £0.56 or AU$17,857 for £10,000. However, by September 29, one Australian dollar bought £0.54, meaning the same transaction would have cost AU$18,518.52, an extra AU$661.38, and a monthly loss like this could amount to AU$7,936.54 over a year.

What to Watch

The outcome of October’s trade talks will be a key factor in the performance of the Australian dollar. However, that is not the extent of the story. Stronger economic data would be welcomed and a predicted boost to the housing market would all go a long way to improving economic sentiment in Australia, especially as it appears the worst is likely to be over for Sydney and Melbourne.

It is expected that the RBA will need to do more to boost the economy, and we could see rates fall as low as 0.25% by the middle of next year according to forecasts from ANZ and National Australia Bank reported on ABC5. This could weaken the Australian dollar, meaning importers face higher costs but giving a big boost to exporters whose goods will be relatively cheaper.

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