1. The Chinese Economy
China, our foremost trading partner, receives a lion’s share of our natural resources, maintaining its position as the world’s second-largest economy. However, the narrative is shifting in 2023, as the post-Covid ‘bounce back’ is yet to materialise. Contrary to the West, both inflation and growth have been remarkably muted, prompting the central bank to slash interest rates to stir growth.
Presently, the hopeful anticipation of a solid economic rebound following the termination of the zero-Covid policy is slowly fading, particularly in light of the recent underwhelming macroeconomic data, including the soft Q2 GDP report. Nonetheless, some still harbour the belief that the government’s growth target of ‘around 5%’ will be met this year; although it is doubtful if it will be significantly surpassed, especially considering the high levels of local government debt, indicating limited scope for further fiscal expenditure.
Recent developments in the real estate market have further dampened the optimistic outlook on the Chinese economy overperforming this year, continuing to hurt the Australian dollar.
2. Interest and Yields
At the time of writing, both Australia and the RBA are positioned at the lower stern of the global interest rate scale.
|Region||Central Bank||Currency||Interest Rate|
|New Zealand||Reserve Bank of New Zealand||NZD||5.50%|
|UK||Bank of England||GBP||5.25%|
|Canada||Bank of Canada||CAD||5.00%|
|Europe||European Central Bank||EUR||4.25%|
|Australia||Reserve Bank of Australia||AUD||4.10%|
Global interest in fixed income assets has grown alongside the rise in interest rates. The US, New Zealand, and the UK set the pace with elevated interest rates amongst major economies. The heightened interest in these regions tends to draw investors due to superior yields, a principal element in the Australian dollar’s recent underperformance.
3. Risk Sentiment
As central banks persist in managing inflation by raising interest rates, the narrative is gradually shifting towards a potential slowdown in the global economy, suggesting a heightened risk of recession.
The Australian dollar often enters the discussion as a ‘proxy’ to risk when investors consider risks. The Australian dollar has an inverse relationship with risk sentiment. Harsh economic conditions and global political issues typically herald a decline in the currency, while favourable risk sentiment and an upswing in equity markets often correlate with a rise in the Australian dollar.
Considering all this, what can companies do right now to better manage their foreign exchange exposure?
1. Speak to an expert
Collaborate with the specialists. Over recent years, specialist ‘fintechs’ have emerged to fill the service gap experienced by companies in foreign exchange risk management.
Institutions, like Ebury, afford companies the chance to evaluate their existing scenario and understand how volatile markets could impact their business. Typically, they seek to comprehend everything from establishing budget rates to refining operational procedures.
2. Build a risk management strategy.
The notion of ‘hedging’ might be intimidating for companies that haven’t investigated risk management strategies. Once you’ve teamed up with a specialised foreign exchange institution, take the time to devise a risk management strategy.
Nowadays, most companies have access to derivative products like Forwards and FX Options to help reduce the risk stemming from volatile markets.
3. Move away from US dollar, pay local currency
Lastly, over the past five years, the Australian dollar has arguably experienced the most turbulence against its greatest trading partner, the US dollar. If you’re dealing with a country other than the US, it’s time to consider using local currency. Often, companies discover not only cost benefits for themselves but also for their local partners and suppliers.
Ebury is a global fintech specialising in Foreign Exchange & Unsecured Trade Finance. Founded in 2009, operating in 22 countries and backed by Santander Bank, thousands of organisations trust our simplified and hassle-free solutions to support their global growth ambitions.
Ebury offers diversified solutions across three key areas, including – payments and collections, business lending, and foreign exchange (FX) risk management. Companies can enjoy benefits like competitive exchange rates, seamless transactions, robust payment infrastructure, international bank accounts in overseas jurisdictions and continuous support from Ebury’s team, making international business far more manageable and efficient.