Lock in an exchange rate before you trade
Sue Tindal, executive vice president of global trade and transaction services from the Commonwealth Bank advises exporters to prepare for a changing exchange rate.
If you’re trading overseas, you run the risk that a sudden rise or fall in the Australian dollar could slash your margin or even wipe it out altogether. That’s why it can make sense to lock in an exchange rate ahead of time.
For Australian importers, the last few years have offered some golden opportunities. Buoyed by overseas demand for our commodities, the Aussie dollar has been riding high, slashing the cost of imports.
For exporters the picture hasn’t been as rosy, with the high dollar reducing international competitiveness and slashing profit margins.
But while the dollar looks set to stay strong for some time, that doesn’t mean volatility is a thing of the past. To take one recent example, between 28 October and 25 November 2011 the Aussie plummeted nine percent against the US greenback, only to jump 11 percent by early February.
So, without hedging in place, an importer signing a deal in late October with payment falling due in November could have found themselves paying nine percent more than expected — enough to turn a profit into a loss.
Similarly, an exporter selling before Christmas and getting paid in February may have been out of pocket by as much as 11 percent. Not a great way to start the New Year.
Finding the sweet spot
Given this volatility, it comes as no surprise that even smaller businesses are increasingly looking to hedge their currency exposure. The Commonwealth Bank’s latest Aussie Dollar Barometer shows that more than two-thirds (68 percent) of import and export businesses with an annual turnover of $25–150 million now plan to hedge currency risk.
If you’d like to protect your business against a volatile dollar, the first step is to keep a close eye on exchange rates so you can rapidly take advantage of movements in your favour. An online foreign exchange tool like CommBiz Markets can help.
With CommBiz Markets, you can not only monitor changing exchange rates and convert money at your convenience, you can also lock in a forward rate for a future transaction. For example, if you’re an importer, it can be a good idea to lock in a forward exchange rate at the same time you raise a Letter of Credit, so you know exactly how much you’ll need to pay.
The aim is to find the sweet spot between benefitting from movements in your favour, protecting yourself against shifts in the other direction, and gaining the certainty you need to plan for the future with confidence.
Talk to an expert
Foreign exchange is complex, and there are no one-size-fits-all solutions. If you’re unsure, talk to a Trade Finance specialist. Their job is to take the stress out of trading overseas and help businesses like yours succeed — no matter which way the dollar moves.
As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on this advice, consider its appropriateness to your circumstances. Commonwealth Bank of Australia ABN 48 123 123 124