US-Australia's relatively stable foreign exchange rates will not stop the volatility expected at the tail end of 2016, foreign exchange companies have warned.

The looming United States presidential election and the expectation that the US Federal Reserve will hike interest rates before Christmas is likely to see ripples in the value of the Australian dollar against the US dollar.

"The Aussie-US has been holding around the mid-70¢ mark," says managing director in Australia of World First, Andrew Porter. "It's been in a neutral zone, but as we move closer to the presidential election in November, and people talk about the "Trump-geddon", we'll see the markets taking positions on the US dollar."

Porter says the Federal Reserve – the United States' central bank – is also expected to move on interest rates before the end of the year, and signal the improving US economy with a rate hike.

"There's still mixed data coming out of the US, but most economists are factoring in two or three rate hikes by the Fed before the end of 2017," says Porter. "The markets will seek to anticipate any movement and we'll see some volatility."

The expected volatility in the Australian dollar could be compounded if the beginnings of a commodity price resurgence gain traction.

Porter says Australian business owners have no control over what happens in the United States, or over the commodity price of coal or iron ore. But they can hedge their foreign exchange exposure by using forward contracts, where they lock in a rate at which they can buy US dollars at a date in the future.

Political uncertainty

He says the Brexit EU referendum fallout was an illustration of how political uncertainty triggers markets: for instance, the GB pound quickly lost 10 per cent against the US dollar as the "leave" decision was announced.

Porter says when the Aussie dollar swings towards either 0.70 or 0.80, currency-exposed businesses seek protection, usually from forward exchange contracts.

Exporters guard against the Aussie dollar moving too high and importers – the majority of whom have to settle in $US accounts – protect against the Australian dollar losing ground to the US dollar.

Very few business owners are betting against the market, says Porter, rather they are shoring up their margins, either against their budget or with an eye to their competitors.

"Some businesses see the rates as neutral right now, and they're happy to buy at spot," says Porter. "But most of our clients take basic forward contracts."

He says while many clients are allowing forward exchange contracts to run out as they buy at spot rates, he expects Australian clients to take forward contracts around the November US election date.

HSBC Australia head of corporate FX sales Paul Edwards says the Australian dollar – and its exchange with the US dollar – have been "benign" for the past few months, with US rate adjustments expected to be slow and spread across 12 months.

"There's a consensus in the market that the Federal Reserve will increase interest rates at their December meeting," says Edwards, "but the expectation is for a small increase, with perhaps another two increases during 2017. It won't be fast."

Consolidation period

He says there is nothing in US economic data to suggest large or sudden changes to US interest rates, which is reflected in the price stability of the Australian dollar.

"In a market that is notoriously volatile, we're in a consolidation period right now."

Edwards says the benign conditions are reflected in forex cover: among exporters he says HSBC business clients on average have 30 per cent of their exposure hedged, while importers are covering themselves for 70-80 per cent of their currency risk, mostly with forward contracts.

"Exporters are covered to the minimum of their treasury policy allowance," says Edwards, reflecting the relatively high valuation of the Australian dollar compared with the forecasts of a year ago which predicted the Aussie dollar trading in the high 0.60 range by the end of 2016.

He says exporters will lock in a rate with forward contracts if the AUD starts falling. Some also use options.

Importers are also using forward contracts and trying to lock in US dollar exchange rates as high as they can.

"Importers are aiming for high .77s," says Edwards. "There's a chart point of [around] 0.78 that the Aussie isn't breaking through, and so a lot of traders sell at 0.77. That's the price importers are locking in to."

Warning against complacency

Edwards says a benign market for the Australian dollar should not translate into complacency.

"When you're used to volatility, and there's a period where that's not a factor in the market, it doesn't mean there's no shocks around the corner," says Edwards. "If you're importing or exporting, and you're in the spot market for currency, changes can move against you very quickly, turning a healthy margin into an unprofitable position."

He says the immediate post-Brexit vote market for GB pound was AUD 0.55, but recently has been 0.68.

"If you're selling a product into the UK at 0.55 and now it's 0.68, you're totally uncompetitive."

Head of Western Union Business Solutions in Australia and New Zealand Mark Davis says the events in the United States before Christmas have the potential to have a material impact on Australian businesses.

"We're looking at the election and the Fed decision in terms of managing foreign exchange risk," says Davis. "Every business has a different view of that risk."

He says the Western Union Business Solutions position is that there could be four slightly different outcomes in how the US dollar is traded depending on the election: a strong Clinton win will mean fiscal stimulus, appreciating US dollar and weakening Aussie dollar; a marginal win for Clinton should mean a status quo with a slight US dollar appreciation and the Aussie dollar staying in its current range; a marginal Trump win would mean a fall in the US dollar and the Australian dollar rallying to as high as 0.79; a strong Trump win, says Davis, has an unclear outcome.

"A strong Trump win translates to volatility in the financial markets because what happens with Trump as president is uncertain and markets don't like uncertainty."

He says the currency risk is not the same for all of its thousands of clients in Australia and New Zealand, but small changes in exchange rates can hit margins.

On a $US500,000 order made at 0.75 today, if the payment had to be made – unhedged – in three months time when the rate was 0.72, the business would have to pay $28,000 more than if the rate was still 0.75, says Davis.

"Our clients don't hedge to beat the market, they do it to protect their margins and maintain profitability."

The use of foreign exchange hedging mechanisms is strong in some segments of Australian and New Zealand businesses, but less frequent in others. Smaller companies sometimes do not hedge because they do not have the tools to monitor, measure and manage the impact currency movements have on their business.

Greater exposure

A global survey recently conducted by East & Partners shows more than three-quarters of New Zealand SMEs use forwards while in Australia only one quarter of SMEs use forwards.

In New Zealand, 65 per cent of micro businesses use foreign exchange forward contracts, three times the levels of the next-closest country, the US, with 19 per cent of micro businesses using forwards.

According to East & Partners' survey, three-quarters of Australian small businesses have never used a forward contract, or an option (where a client secures the right – but not obligation – to buy a currency at a set value on a certain date).

Martin Smith, head of markets analysis at East & Partners Australia, says Australian businesses are carrying greater currency exposure as import and export volumes grow, but they are not as sophisticated in handling currency risk volatility as their global peers.

"As the Australian dollar approaches one-year highs against the greenback, internationally trading firms need to be more attuned to the risks they are facing," says Smith. "Minor fluctuations quickly erode margins, impacting cash flow and their bottom line."

The global trade finance banks have also seen a relaxing in demand for currency hedging facilities.