Market Meltdown

The world has fundamentally changed since the last edition of this update. COVID-19 has significantly shifted the economic, social and political landscapes in ways we could not have imagined just a few months ago. Anyone walking through the Sydney CBD could see the signs of a recession unfolding. Shops closed, desperation sales at those open, staff disappearing and reduced operating hours. With the infection rate increasing exponentially, the full economic impact in Australia is yet to be felt.

The impact on financial markets has been extreme. We have witnessed the fastest ever crash of equity markets, outpacing even the GFC and dotcom bust. Major indices have fallen over 30%, with terrifying daily declines; market action not seen since the stock market crash that preceded the Great Depression of 1929.

The impact on the AUD has also been extreme, with the Aussie down 14% against the USD in the space of just 2 weeks. The below chart says it all. As importers and exporters, it’s imperative to understand the what and why, so that you can position yourself appropriately for the coming months.

In the case of COVID-19 the AUD is being hit from all angles. Domestically, we’re starting to see the shutting down of all non-essential services; consumer and business confidence is subdued to say the least. Consumers are only spending on the necessities – groceries and pharmaceuticals. We’re about to see a significant uptick in unemployment as a result. Internationally, supply chains have been disrupted, and with whole countries on lock down, demand for Australian commodities has been weak. Unlike the GFC, iron ore and coal will not support the economy and prevent Australia from going into recession.

Source: tradingview.com

For our importers this has been disastrous. We obviously have increasing demand side pressures, however it’s the supply side that is worth focusing on as this is where you maintain some control. For many importers, the cost of their goods has risen by 14% in the space of two weeks, and 20% since the start of the year. Sobering figures, and the reality is many will be unable to continue operating unless they can switch suppliers or pass these costs onto their customers.

For others however, they are weathering this storm through the protection offered through forward contracts. Throughout the year we’ve placed significant emphasis on hedging because of the high volatility associated with the AUD. Those who have instituted rolling hedging programs are now buying their currency well above the spot price, offering a significant comparative advantage. It also smoothes out the volatility and increases their average exchange rate. The more savvy, acknowledged early the risk to their business and entered into 6-month forward contracts for the majority of their upcoming commitments. The Corporate Dealing Team at WorldFirst saw a significant uptick in its volumes. Following on from earlier newsletters, stop losses were also executed on the way down to protect budgeting rates.

In the zero-sum game that is financial markets, it is the exporters that are continuing to benefit from this move. WorldFirst has seen significant upticks in large spot trades, as money that was sitting on the sidelines is being repatriated to take advantage of these 18-year lows in the AUD. FX markets are dynamic however, and for the exporters they will need to start thinking soon, how long before we see a rebound in the AUD?

Looking to the month ahead, the direction of the AUD will be determined by how successful the social, fiscal and monetary policies enacted by the RBA, Federal and State Governments will be. Of particular interest is the RBA slashing interest rates to a new all time low of 0.25%, accompanied by, for the first time ever in Australia, Quantitative Easing (QE). Through the purchasing of Government bonds and semi-government securities, the RBA will flatten the yield curve, reducing real interest rates, making credit cheaper. All else being equal it should also put downside pressure on the AUD, so for the time being I still believe the risk is to the downside.

Key Releases for February/March

Below we include the key scheduled economic releases for the remainder of March and April. We highlight the key events to markdown. Ask your account manager how these releases will have a short-term impact on the rate so you can take advantage of any spikes if the data is better/worse than expected.

Disclaimer: These comments are the views and opinions of the author and should not be construed as advice. You should act using your own information and judgement.
Whilst information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed.
All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice. 
Please consider FX derivatives are high risk, provide volatile returns and do not guarantee profits.