How Low can the AUD go?
There has been continued downward-pressure on the AUD recently, this morning sitting below 68c on what has been a consistent downward trend for about 18 months (late January 2018 was ~81c).
Below is the 5 years chart for the AUD/USD (Source: OFX), which provides food for thought as to how much it has moved in the past.
Here’s a few notable points in markets recently:
Trump’s Trade War with China only seems to be heating up further.
China seems to be playing games with Coal stockpiles and/or slowing ships at port (not the first time they’ve played that game).
Iron ore price has dropped back off its peak (although it is still about 60% higher than 12mths ago!).
Bets are heavily on that the RBA will make another cut shortly (potentially today, failing that then next month?).
Inverse Yield Curve is well in play, with 30 through 180 day BBSY sitting at 0.985% to 1.01% whilst 3 year swaps are a massive 30+ bps lower.
The stock market this morning started ugly, about 3% down instantly, with gold heading up.
Amongst all of that, there’s not much argument for a likelihood of the AUD recovering north again. If anything, it all amounts to some pretty strong downside risk for the AUD.
The big question that often gets asked is:
“HOW LOW COULD IT GO?”
If you’re any older than your early 30’s, you may well remember that in 2008 (yes, THAT year):
7th July – 96.7
1st September (a whole 8 weeks later) – down ~15c, to 81.6
20th October (another whole 7 weeks later again) – down another ~19c, to 62.3
And if history is anything to go by, I remember having a particularly expensive holiday in the USA in 2001, which saw the AUD/USD go below 49c in March and September.
As much as all the economists and FX forecasters talk about “well it could go another 5c lower” (or whatever crystal-ball rubbish they spit out), I would suggest that you’ll struggle to find evidence of anyone having forecast those huge drops back in 2008 and 2001.
Does this mean I’m calling a massive drop? Well since pretty much all professional economists are near useless at forecasting the AUD’s future, and since I don’t happen to be the proud owner of a crystal ball, I’ll refrain from making any forecasts.
BUT what I WILL do, is strongly suggest that if you (or your clients) are exposed to FX rates, particularly for importing (for which a lower AUD = higher cost to buy in other currencies = lower profit = bad), the key question to be asking right now is:
“How well can the business sustain any further drops in the AUD, to what extent, in what time?”
Should you ask “what if it drops to 65c in the next 6 months”? I would say that’s undertaking risk analysis with fingers and toes crossed, facing all directions and praying to the gods of all religions.
Consider the real potential risks. Now although 2008 was the GFC hitting and therefore is the extreme case, it is worth looking at as to how fast the AUD has dropped in the past - remember above - 15c in 8 weeks, to a total of nearly a 35c drop in 15 weeks.
What would your business look like, if the AUD dropped 35c – or even half that much – before Christmas this year?
If the answer isn’t pretty, then you should be very seriously considering how you can mitigate your FX risk.
(FYI, my personal opinion is that hedging via instruments such as Forward Exchange Contracts is far more effective than crossing fingers & toes and praying to all gods)