Australian corporates are demonstrating high rates of hedging as they seek to manage business and investment risks amid elevated uncertainty, according to the inaugural CommBank FX Barometer .
Drawing on a quarterly survey of around 1,000 Australian-based corporates and superannuation funds exposed to foreign currency markets in their operations, the report provides insights into their forex expectations, exposures, and hedging behaviour.
The April CommBank FX Barometer survey was conducted between 16 February, prior to the start of the Iran war, and 10 April, shortly after a ceasefire was announced.
The data highlights elevated hedging activity by corporates, brought on by the uncertainty the conflict has provoked. The report shows importers are hedging around 80 per cent of their currency exposures. Exporters that hedge cover 86 per cent, indicating a selective approach to lock in dips in the Australian dollar amid heightened global uncertainty. By contrast, businesses that both import and export are hedging around two-thirds of exposures, reflecting partial natural offsets.
Corporate profits are highly exposed to the AUD
The hedging behaviours of Australian businesses show company profits are highly exposed to movements in the Australian dollar, with smaller businesses more vulnerable to adverse currency movements compared to their larger counterparts.
The CommBank FX Barometer found that more than 80 per cent of importers expect profits to fall. Those that expect a decline see profits sliding by an average of 6.8 per cent following a 10 per cent decline in AUD/USD. Meanwhile a similar share of exporters expect profits to rise, with expectations of an average of 7.9 per cent uplift.
CommBank Economist and Currency Strategist Carol Kong said the results highlighted the importance of hedging currency risk to protect against market movements.
"The CommBank FX Barometer shows changes in AUD/USD can have a large impact on profits and capital spending plans, highlighting the important role of hedging currency risk to help protect against unfavourable moves in currencies," Kong said.
The CommBank FX Barometer also demonstrates clear differences in hedging behaviour by business size. Almost all large corporates with turnover above $A725m currently hedge their currency exposure, compared to 54 per cent of businesses with turnover of $5m to $20m.
"Large businesses hedge around 80 per cent of their currency exposures, while smaller businesses hedge around 53 per cent, highlighting the higher exposure of smaller businesses to unfavourable currency movements," Kong added.
Super funds' hedge ratios vary widely by asset
When it comes to super funds, the CommBank FX Barometer shows that they hedge three-quarters or more of their foreign property and infrastructure assets. This compares to assets like foreign private equity and hedge funds, where hedging levels are below one-third.
The report found that more than 80 per cent of super funds plan to increase their exposure to foreign exchange in the next three months. Among this group, the average planned increase is 13.6 per cent. No super funds surveyed expect to decrease their foreign exchange exposure.
CommBank Head of FX, International & Geo-economics Joseph Capurso said the findings highlighted significant variation in the way super funds hedge foreign assets, with higher hedge ratios in core asset classes and lower coverage in alternatives.
"The CommBank FX Barometer shows significant variation in hedging ratios across super funds' foreign assets. The core of these portfolios - listed equities and fixed income - have hedge ratios of around one-half and two-thirds, respectively," Capurso said.
"By contrast, investments in private equity and hedge funds are much more exposed to currency moves, with hedge ratios below 30 per cent.
"Looking ahead, almost 90 per cent of super funds expect to increase their hedge ratios in the next three months. Hedge ratios are expected to rise across all asset classes, particularly private credit, private equity and hedge funds," he said.
Australian dollar expected to stay above 0.70
The CommBank FX Barometer found that super funds expect the Australian dollar to trade near $US0.71 by year-end, while corporates are slightly more optimistic, forecasting it to finish closer to $US0.72.
"The CommBank FX Barometer shows both corporates and super funds expect the Australian dollar to end the year near current levels, around 0.71 to 0.72," Capurso said.
"Nevertheless, Australian businesses may be caught out by a lower Australian dollar driven by 'US exceptionalism', including the artificial intelligence boom, as well as the Iran war.
"The stark differences in hedging suggest larger businesses are better protected than smaller businesses if the dollar falls," he said.
You can read the full CommBank FX Barometer here .
