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AUD Surge Casts New Light on FX Risk Management Deficiencies

AUD Surge Casts New Light on FX Risk Management Deficiencies

(5 June 2020 – Australia) After depreciating to its lowest trading level in two decades of 55 US cents in mid-March, the Australian Dollar (AUD) has recovered strongly to shoot past 70 US cents, defying corporates expectations. Even more surprisingly there has been a lack of commentary relating to the surging currency by the Reserve Bank of Australia (RBA) as the AUD/USD currency pair advances over 25 percent from Q1 2020 mid-March lows to astonishingly trade in the green year to date.

Currency analysts maintain it is influenced less by geopolitical concerns, COVID-19 pandemic and protest crises in the United States anchoring the greenback and more associated with the fact that China's economy has been lurching back to life following COVID-19 enforced shutdown. Commodity and resource imports have recovered strongly, in particular iron ore.

In the wake of the coronavirus pandemic health crisis on national economic growth, underlying FX volatility has accelerated alongside tightening credit markets, dovish central bank monetary policy and quantitative easing (QE). As a result, East & Partners research shows AUD/USD forecasts have been aggressively shifted down by over 10 cents round-on-round from 0.668 for the end of H1 2020 to 0.563 for the end of 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.

Separate analysis also captured currency losses experienced by Australian firms. A staggering eight out of ten enterprises experienced FX 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 sixth Australian currency forecast analysis provides a unique insight into CFOs and corporate treasurers expectations about future exchange rate movements for the Australian Dollar (AUD) against five major currencies including the US dollar (USD), Sterling (GBP), Euro (EUR), Chinese Renminbi (CNY), and New Zealand Dollar (NZD). A structured sample of up to 2,600 enterprises with FX exposure are interviewed biannually. Research fieldwork was executed over the four-week period ending 13 March 2020.

"The USD remains on its back foot as risky asset prices continue to ignore ongoing trade tensions and increased social unrest in the US. We look to US70 cents to be a key resistance marker. TD is cautious overall on the Aussie; it's too late to chase it higher. We look for AUD/USD to retrace rather than build off the recent highs, though our medium- and long-term forecasts are bullish. That said, tactically, it also screens hot against dollar bloc crosses. We think AUD/CAD and AUD/NZD have started to top out"  TD Securities said in research note.
Westpac predicts that the Australian dollar will end the year as US68 cents noting a number of key assumptions are met. "The recovery in the dollar does seem a bit too strong from our point of view. Why did it rise 2 US cents in a single day? It seems like there's been a bit of overshooting” stated Westpac Currency Strategist Sean Callow.

“If the global economy really is bottoming out and rebounding again, and US interest rates are at zero and potential growth is lower than emerging markets, we could see the dollar enter into a bear market that could last for five to 10 years” commented Citigroup FX Strategist Calvin Tse.

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