Record bearish currency stance fails to avoid costly losses
(3 April 2020 - Australia) In the wake of the devastating coronavirus pandemic, underlying FX volatility has accelerated alongside tightening credit markets, dovish central bank monetary policy and quantitative easing (QE). As a result, currency forecasts captured as part of East & Partners global Business FX program have been significantly impacted.
Australian importers and exporters slammed their AUD/USD forecasts lower by over 10 cents on average round-on-round from 0.668 for the end of H1 2020 to 0.563 for H2 2020. This represents a record low FX forecast for the program, reflecting the growing level of risk aversion present among importers in particular finding their international competitiveness eroded by a strengthening US Dollar. The US Dollar may run out of steam in the face of growing unemployment and escalating health crisis, with seasonally adjusted initial jobless claims rocketing to 6.6 million, an increase of 3.3 million from the previous week's revised level. This marks the highest level of seasonally adjusted initial claims in the history of the seasonally adjusted series.
A staggering eight out of ten firms experienced losses through Q4 2019 and Q1 2020 (77.1 percent), on average reporting a currency loss of A$28,200 in a broad range from A$1,000 to A$111,600.
The Aussie dollar depreciated heavily in Q1 2020 as the economic fallout from coronavirus induced shutdowns and border closures adversely impacted global economic output. A deep global recession is not beyond the realms of possibility as the crippling demand side shock reverberates up and down increasingly globalised supply chains.
The AUD/USD approached 2008 global financial crisis lows as it collapsed below 0.600, underperforming major currencies in response to the Reserve Bank of Australia (RBA) slashing the overnight cash rate to a record low of 0.25 percent and ‘firing up the printing presses’ with the introduction of quantitative easing (QE). The central bank seeks to decrease three-year bond yields to 0.25 percent as monetary policy efficacy becomes muted by the wide scale slump in demand across tourism, retail and transport sectors.
The AUD is likely to be pressured further as government borrowing is boosted at a record pace in Q2 2020 to fund an unprecedented A$320 billion in broad ranging business, welfare and wage stimulus to counter the impact of the coronavirus outbreak on the economy. The RBA has purchased A$27 billion in face value of federal government bonds and A$5 billion of notes issued by state and territory governments since it commenced repurchasing last month to hold down borrowing costs across the economy.
“The RBA could indicate a willingness to expand its low-cost funding facility for banks and should consider expanding its bond-buying program to the corporate debt market” stated AMP Chief Economist, Dr. Shane Oliver.
AUD/NZD forecasts also surpassed a milestone, dipping through parity in March 2020 and followed by a December 2020 forecast of 0.956 among Australian enterprises, well below the record high H1 2018 forecast of 1.125 recorded in December 2017.
Direct interviews are conducted with 13,000 enterprises in the Micro business, SME and Corporate segments across Australia, Asia, Europe and North America every six months, on where businesses expect their domestic currency to trade. The analysis provides a unique and deeply insightful outlook of where importers and exporters expect FX markets to trade, revealing a new and complementary perspective from businesses at the daily ‘coal face’ of FX execution.
Currency Losses Experienced – Last Six Months
% of Total (LHS) / Average Currency Loss A$000 (RHS)