Selling the Australian dollar one indicator that expresses a view the world is a riskier place today than it was yesterday.
Judging by the heavy selling over the past few months this is currently the case.
In mid-June 2018 the Australian dollar was trading at around its lowest level in more than a year, falling to US73.49¢ overnight before recovering to trade at US73.88¢. This is positive for clients who are exporters but challenging for those of you that are importers.
If you are a heavy importer and think the current falls in the Aussie are only the start of the price fall it may be time to talk to your bank or an exchange trader about buying some hedging positions.
The current loss is argued to be as a result of trade tensions between the US and China this week and a diverging interest rate outlook between Australia and the US. There is an even split amongst the bankers whether this is a short term drop and a bottom or as the below chart shows the Aussie is close to a 2 year low and about to retest the levels of a few years ago when many argued the dollar may drop towards 60 cents again.
Central banks last week stated that it is more likely global interest rates will rise than fall but in Australia the case is less likely for any short term rises.
On the housing front rate rises are no longer required to slow housing prices, we are already seeing a pull back. Debt as a percentage of household income is at record levels so any rate rise will place heavy pressure on the economy.
RBA signals have been consistent in pointing to glacial progress on interest rates. The RBA has made it clear that rates are not a near-term story.
The latest move in the Australian dollar highlights that, in currency markets, countries that are net debtors still suffer when risk aversion rises.
“Australia is one of the big net debtors of the world. It owes the rest of the world around $1 trillion, from a combination of government, corporate and bank debt.”
“Relying on the kindness of strangers means that Australia owes the rest of the world a lot more than they owe us. When risk goes off, the worry is that international investors are more inclined to keep their money at home.”
Commonwealth Bank’s chief currency strategist Richard Grace said that increased support for the US dollar was also playing a part in the Australian dollar’s weakness.
“The US economy has strengthened by more than expected,” he said. Last week’s Federal Reserve meeting made that clear, with the Fed upgrading the economic outlook and lifting its interest rate guidance.
At the same time, the European Central Bank downgraded growth and said it expects interest rates to remain on hold for longer than previously expected. That impacts confidence and business investment and can feed into slower growth, an environment that typically benefits the US dollar.
Those businesses who are considering exporting will be well positioned to make the move if the dollars spiral was to continue.