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Parity with USD: what it means for exporters

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Now we've hit parity, what should exporters do? With the dollar breaching the $1US mark briefly last week the spotlight was on exporters, especially the smaller ones with concerns that the high exchange rate will make a dent in profitability. While the dollar has since fallen back to under US$1.00, the reality is that many exporters have been doing it tough since the dollar started its run from the $0.88 mark a month or so ago. Exporters (especially non-miners) and domestic firms which compete with imports are now facing serious competitive pressures. They will be struggling due to the value of their clients' currency buying so little AUD. They face a difficult decision-either put up their prices to maintain their projected cash flow and suffer the consequences of greater competition or keep prices the same and eat into their profit margin. Given the currency has moved 24 percent over the last five months, it may not be possible for exporters to cover the gap. This could be exacerbated by a potential credit squeeze as banks tighten facilities because of concerns the high dollar may lead to exporters losing customers, thereby pushing up default rates. This squeeze can apply both to general finance and to FX facilities. Now may be a good time to see if you are getting the best deal both on pricing and in terms of the service you receive from your current provider. And it’s worth noting that FX is no longer the domain of the Big Four banks, so it can pay to shop around. For example, Travelex has partnered with EFIC to provide a Foreign Exchange Facility Guarantee that allows exporters to access increased FX credit lines without the need to provide additional upfront security. Recent data shows that businesses are increasingly taking longer to settle their accounts. With the higher dollar squeezing margins, exporters can ill afford to let receivables blow out. They should take the time to review cash flow projections and implement measures to ensure receivables come in on time. It might also be an opportune time to review your terms of trade to try and get cash in the door sooner. Simple measures such as insisting on electronic payment, rather than cheques or drafts, may also help to improve cash flow. While some exporters might decide there is little benefit in hedging when the dollar is so high, for those worried about the long-term impact on their business of the currency trading over $1US for any length of time, there are some opportunities to hedge $US exposures at a hefty discount to the current spot rate. Given that the AUD/USD one year forward yield is at its highest level in the past two years, forward exchange contracts may be appealing for some exporters. For example, at a spot rate of 0.9700 and with the current six-month forward margin of around minus 215 points, exporters can get a six-month forward rate at 0.9485, protecting profitability of export contracts should the dollar stay close to parity. While this will not be appropriate for all exporters, it is a good reminder that SME exporters should always know their budget rates-the rate at which they can profitability sell their product offshore-and put in place a currency strategy which maintains profitability over the longer term. With all of the volatility and sometimes conflicting media commentary that surrounds it, the important aspect for exporters to remember is that they should focus on how to protect their profit rather speculating on where the dollar might go. This information is general in nature and does not take into account individual business objectives, financial situation or needs. For more information about financial products from Travelex visit www.travelexbusiness.com/au

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