Even the slightest currency movements can have an enormous impact on your bottom line, so it’s worth taking the time to get a plan in place to protect your business.
The World Bank, corporate banks and economists are all putting out their currency predictions for the year, so the new calendar year presents an opportune time to set and adjust goals, budgets and overall currency approach.
The US dollar is currently facing a number of challenges, including resurgence from a strong Euro and GBP and scepticism about the forthcoming tax breaks. However, the Fed has signalled a further three rate hikes in 2018.
Overall, the Australian dollar (AUD) saw a strong 2017, reaching a two-year high of 0.8125 against the US dollar in September and breaking through the 0.78 mark by year end.
For 2018, many market commentators are expecting to see further strength in the AUD, with a lot of conviction around it revisiting levels of around 0.8125. Strength in the Australian economy has driven predictions that the RBA might be forced to increase rates at least a couple of times this late this year.
A word of caution for the AUD outlook is China. Historically, all it has taken is bad news from China for the AUD to fall. While there is a lot of positive news, if there is any kind of shock from China or global markets in general, the local currency is prone to move.
So, what does this all mean for Australian importer and exporter businesses? If you combine clear business goals with a currency risk management strategy, you may be one step ahead. Here are my top three tips to help you along the way:
- Plan ahead
At several stages throughout the year, it is important to forecast sales and purchases, consider the potential volatility impact of market movements and then set a budget to determine profit margins and product prices. Ultimately as a business owner, you need to make sure that your budget aligns to the goals of the business - whether these are achieving market share targets, launching new products, adapting to changing industry conditions, investing in improving quality or winning more contracts.
It’s also important to be aware of the exchange rate you have based your budget on. As a rule, budgets should never be set around currency market speculation as guessing the direction of the markets can be a frustrating waste of time and energy.
Your budget needs to be planned yet flexible enough to quickly recover from, or factor in, the fallout from major global events. Regularly checking and revising your budget throughout the year could save you a great deal in the long run.
2. Continue to hedge
Our view is that the market should not be complacent on the outlook for the AUD. Exporters and importers who have implemented a hedging strategy should continue to hedge, with some optionality available.
Commentators are currently forecasting stronger economic growth and a declining unemployment rate in 2018, predicting two rate hikes by the RBA as a result. This would bring an end to the bank’s elongated easing cycle that began in late 2011 and would support a stronger AUD.
The local currency is also heavily pegged to the price of resources such as crude oil and iron ore. Currently the iron ore price has settled but crude oil is at a two and a half year high. This could have the knock-on effect of increasing the price of other commodities, which would see the AUD move higher.
3. Seek strategic advice
The currency markets are full of risks and opportunities for importer and exporter SMEs, but managing these can be a full-time job – which can be a distraction for a full-time business owner.
It’s best to consult with a foreign exchange provider throughout the year who understands your industry and can provide relevant currency market insights and analysis, as well as gauge what market shocks may be around the corner.
Whether you’re importing or exporting, there are a range of currency risk management strategies available to protect your bottom line and keep your budget on track. The most appropriate strategy takes into account your level of activity, market exposure, risk appetite and budget flexibility.
By putting steps in place to mitigate risk and capture opportunities, you can remain focused on what matters – the growth of your business.
James Swerling is Account Manager at AFEX Australia, a leading global payment and risk management solutions provider that specializes in cross-border transactions.