Here's how Australian companies have responded to the recent spike in AUD volatility

Along with the sharemarket volatility, the COVID-19 crisis also gave rise to some huge moves in other asset classes.

That included a notable slump in the Aussie dollar, and while it’s an adjacent asset to stocks, the AUD still has a bearing on the outlook for a lot of small caps that are reliant on global trade.

Among other things, the Aussie dollar is often viewed as a proxy for global risk sentiment, due in part with its connection to commodity prices.

And the recent price action — a rollercoaster from US67c in February to US55c in March, before a rally back to US65c — has broadly tracked the movements of risk assets globally.

To get an idea of how Australian companies have responded to that volatility, Stockhead caught up with Michael Judge, Head of Australia and New Zealand at OFX foreign exchange provider OFX.

Judge highlighted what changes OFX had noticed, along with his views on the outlook for the AUD this year as the global economy attempts to recover from the COVID-19 shock.

From OFX’s perspective, Judge said the platform saw a large uptick in two types of product usage; forward exchange contracts and limit orders.

“Forward exchange contracts picked up exponentially, where clients were looking to secure rate now for a period of up to 12 months,” he said.

“A lot of Australian companies with import operations were able to secure rates at 65c. And I think that was in recognition of not only where it fell to in March, but where its been over the next 12 months, it’s probably a fair assessment to say that 65 level is something a lot of businesses can stomach.”

Certainty is a priority

As a measure of the pickup in activity, Judge said that across the March-April period, OFX saw the use of forward contracts increase by more than 150 per cent from the prior-year period. In other words, certainty become priority number one.

“All of a sudden, there’s now so many variables that businesses are trying to scenario-plan for. So if they can take daily currency moves out of their business assumptions, that’s something they’re craving,” Judge said.

OFX also cited the increased use of limit orders — the opportunity to buy or sell assets at a specific price or better.

Judge said the use of limit orders had ramped up in the wake of the “liquidity-fuelled” market rebound, where the AUD recouped its losses and retested recent highs back above US65c.

“It provides some corporate stability because companies can set a targeted rate that they want to trade the currency, let’s say a set amount, at US65c, US66c and US66.2c,” Judge explained.

“If there are short periods where the Aussie’s hitting new high marks, clients are using limited orders frankly to a level we haven’t seen probably since Brexit,” he said.

“So limit orders are really useful, particularly in an environment where the highs are looking a little bit higher compared to what we’ve seen recently.”

Looking ahead, Judge said that as a highly traded global currency, the AUD will be subject to a number of competing forces in an increasingly complex environment.

While price moves are difficult to predict, he did highlight that the broader macroeconomic picture could create some headwinds for a push back towards US70c.

A little ‘top heavy’

“I think one risk for the Aussie — and this applies to all markets and asset classes — is it going to be able to escape the macro outlook still to come?” Judge said.

“If you look at global employment figures along with household and consumer data, the macro picture probably isn’t going to be conducive to a higher Aussie.”

At the same time, he noted that valuing currencies was a relative exercise. For example, price action for AUD/USD will also be driven by the respective performance of those two economies.

“In terms of what’s happening in the US, what could be supportive (for the AUD) is that Australia looks to be on track to recover quicker than the US,” Judge said.

“In terms of a return to normality and community transmission rates, Australia is a fair way advanced from where they sit and better prepared for that return.”

On the balance of it though, Judge said that at current levels around US65c the AUD was looking a little “top-heavy”.

“Up to now, I think this rally has really been fuelled by the liquidity response from central banks and governments, so markets are still being heavily supported,” he said.

“That’s encouraged the Aussie to push back to pre-COVID levels. It’s got a sugar hit and prices have stabilised, but I think it’s going to be about that relative strength against those US struggles, depending on how much weight is put against the macro numbers, which aren’t going to be supportive.”