Australian importers and exporters are facing significant challenges in the current environment.
There are two critical considerations from a business continuity perspective – can your business survive the next few months – and what is the longer-term outlook?
For businesses who trade internationally, appropriate currency risk management is even more crucial in the current environment.
Our clients who are in a strong position are those that have implemented a lot of flexibility in their hedging, allowing room to manoeuvre during the wild fluctuations we’ve been seeing in the Aussie dollar – ranging from highs of 0.667c, to lows of 0.555c in the last month alone.
In terms of the economic environment, the recession is here. Companies should now be considering what the recovery phase looks like and how quickly that will come. Will it be a few quarters to get the economy back to the same size it was before the crisis? Or will it take a couple of years?
In the US for example, their economy is looking at a 15 percent contraction over two quarters. It might take five or six quarters of economic growth of 3 to 4 percent to return the economy to its prior level, and possibly even longer. This is the reality that many companies need to factor into every aspect of operations, including FX management.
Impact on supply chains
There are only a limited number of countries where certain products are manufactured, which is causing global concern as channels of freight continue to be held up and disrupted.
Many businesses are starting to uncover the extent of this now, and issues of being overly reliant on a single manufacturing market are becoming evident. While there are still plenty of possibilities that could play out before the COVID-19 crisis has passed, the closure of borders is having a significant impact on freight and supply chains. This will be something to watch closely over the coming months.
China’s return to normality
The PMI data coming out of China, which tracks demand for orders, has shown a very slight improvement. Conditions slumped significantly in February and while there has been an increase, order levels certainly haven’t bounced back to normal.
However, there are a few important indicators that have effectively return to somewhat normal levels. Road traffic is getting close to normal, pollution levels are back up, iron ore and coal utilisation are coming back to normal levels.
Key issues for Australian importers and exporters
While volatility in the Aussie dollar has reduced slightly, it remains concerning. We are seeing some very strange behaviour in currency fluctuations, with wild swings in intraday moves that seem to come out of nowhere. There is still plenty of anxiety in the market.
It is a very uncertain time for importers and exporters, and those with small margins will be under a lot of pressure. Importer distributors, for example, like fashion wholesalers, will be struggling significantly on small margins and the added pressure of logistics issues.
Right now, companies are focused on day-to-day operations and managing their staffing requirements. For the most part, formal FY21 budgeting hasn’t commenced with so many other immediate priorities requiring attention.
Lessons from the GFC
During this time, it’s worth recalling valuable lessons from the GFC. During this time, many importers who were holding forward contracts saw the Aussie dollar drop and sold back the contracts to inject cash into their business, believing it was the bottom of the market.
However, the Aussie dropped even further, and they were forced to buy worse exchange rates for goods coming in.
Another issue for companies is holding forward contracts at low levels when the Aussie goes shooting up. This is a key reason why having as much flexibility as possible is highly beneficial.
In times of turbulence and severe uncertainty, we urge business owners to act in a measured way and consult with a foreign exchange provider who understands your business and broader operating environment.
An expert can provide relevant and sound currency market insights and analysis, helping you make crucial decisions and protect your bottom line.
James Swerling is Senior Dealer, Fund & Institutional Sales at AFEX