Australian Dollar Is Weakening Again: What Can You Do?
For all that it’s the fifth most-traded currency in the world, the AUD isn’t a strong currency. However, its weakness hasn’t been much of an issue for the Australian economy. Until now. The latest recession has changed many things, including the position of the Australian Dollar and its prospects for recovery. This is not a good time for any Australian business. However, astute traders and businesses exposed to the AUD might have a brighter future.
AUD Today: Not Your Usual Good from the Weakening Dollar
The Australian Dollar has fallen to a record low since 2002 this March. That, in itself, shouldn’t be concerning because this currency has shown rapid falls before, especially in times of recession. The same thing, but not on this scale, happened in 2008, and later in 2014.
In fact, as the Australian economy is closely dependent on many other economies, the currency has been quite unstable. It’s also generally weak. But that used to be a good thing for the country.
Weak Australian Dollar meant cheap Australian exports. Therefore, whenever the currency weakened, the country’s economy got a boost from all those interested in natural resources and goods coming from Australia. Those are quite a few, so the influx of money always served to strengthen the economy. As a result, it strengthened the currency as well.
This cycle continued from year to year helping Australia to grow into one of the overall strong developed economies.
However, the coronavirus pandemic changed all this.
The problem today is that the fall in the AUD didn’t result in the rise in exports. The world has too much to deal with and global trade is all but blocked. Therefore, there is no way for Australian businesses to capitalize on the overall bad situation for their country’s currency.
Moreover, the strengthening USD means that all import prices have gone up. With the consumer capacity for actually buying goods on the down-low, the increase in prices is a serious issue.
All these factors combined put the country’s economy in a very weak position. And at the moment, there doesn’t seem to be an easy way out for it.
Is It Time to Hedge?
- Businesses exposed to the AUD need to try and make the most of the current situation. For many of them, this means that they need to reduce their risks associated with the foreign currency exchange (FX) volatility. To do this, business owners can use AUD FX hedging. Today even small businesses have easy access to a variety of hedging tools offered by money transfer companies.
The best tools for small businesses are:
- Forward contracts. This type of hedging tool provides you with the right to purchase foreign currency at a set FX rate. This is effective protection from rapid falls (or rises) in the currency value. It can help businesses to budget and plan for the future because forward contracts remove FX volatility from consideration.
- Stop-loss orders. This hedging tool allows you to purchase foreign currency when its value falls to a specified rate. This can help a business avoid a big loss caused by FX volatility. As the AUD might depreciate further yet, this is a good tool to use at the moment.
- Limit orders. Business owners can use this type of hedging tool in order to complete smaller trades at specified rates. This can help a business to make the most of an unfavorable economic situation.
Note that hedging tools aren’t a free service. For example, a forward contract might cost you 10-20% of the contract’s total value in a deposit. This means that you’ll have to pay the money the moment you sign the contract. The rest is to be paid when the contract is due. This type of contract usually lasts 12 months.
How to Make the Most of the Current AUD Situation?
One good thing about the volatility on FX markets caused by the recession is that you can use this situation to your favor. With a sound FX trading strategy, you might be able to use a combination of hedging and quick trades to capitalize on favorable rates. But bear in mind that in such volatile conditions, rates change quickly. Therefore, anyone who wants to make the most of these circumstances needs to monitor all changes constantly.
The good news in that money transfer companies offer a variety of tools that make it easy to keep an eye on the fluctuations in FX rates. Apps can provide you with alerts and the companies also offer forex advice.
For the businesses exposed to the Australian Dollar the current situation doesn’t look very good overall. At the moment, the AUD is weakening. And as the Australian economy continues to struggle, the currency will continue its descent.
However, judging by historical patterns, the AUD will get stronger reasonably fast once the economy stabilizes. The majority of countries are already loosening their lockdowns. Therefore, global manufacturing and trade should start recovering fast.
It will take some time for the global, and subsequently Australian, economy to get back on track. However, this process is already starting. Therefore, if you need to capitalize on the weak AUD, you should consider hedging right away.
On the other hand, if you need the currency to be stronger, you should do your best to wait for a bit. In the meantime, remember that the USD isn’t as stable as one would want. This is the reserve currency of the world, which is why it’s rising in value. However, the US economy has been hit very hard by the COVID-19 pandemic. The situation in America is difficult and unpredictable. Therefore, there is a risk that the USD will crash despite its status. This, in turn, will affect all other currencies.
The COVID-19 pandemic has already changed the world. The recession it caused will change it further, especially as it’s going to last for a while. This situation caused the FX markets to become highly volatile and weakened many currencies. The AUD will continue to weaken for some time yet because of the recession. However, it will grow stronger once the economy stabilizes. Therefore, if you are in a position where weak AUD benefits you, now is the time to capitalize on it. Hedging will be a great help for businesses exposed to the AUD.