Currency strategies for the “new normal”

Preparedness will be the single biggest factor in determining how your business survives the COVID-19 pandemic and beyond.

Since the COVID-19 pandemic hit there have been plenty of unwanted surprises for business owners and the saying, “prepare for the worst but hope for the best” has never been more appropriate.

From forced shutdown periods to supply chain hold-ups, the last few months have been quite literally the opposite of “business as usual”.

For businesses with exposure to international markets, the stress and impact of COVID-19 has been amplified. The global economy is not just being hit by an infectious disease but also myriad other challenges. As a result, liquidity, or lack thereof, is the main theme spreading through all markets, and is further fuelling global uncertainty and volatile currency movements.

Almost all economies that can afford it have entered various degrees of monetary stimulus, backed by varying fiscal measures. In the case of the US, the central bank has expanded its balance sheet by over $2 trillion since March and the Federal Reserve do not expect to undertake an interest rate hike until 2023 or beyond.

Similarly, in March the Australian government announced a $189 billion stimulus package to support workers and businesses. The RBA has made it clear the cash rate will not increase until Australia’s labour market moves closer to full employment and inflation is in the target range of between two and three per cent. With economic fundamentals in a state of flux, and uncertainty poised to continue for some time, it’s important to consider how your business is positioned to weather the storm.

The tough reality

For many businesses, the unprecedented nature of COVID-19 has severely impacted their ability to maintain operations or stay afloat.

The latest data from the US shows 40 million Americans are now classified as unemployed, and one in four have applied for unemployment benefits. More than 100,000 small businesses are estimated to have closed their doors permanently.

In contrast, Australia has fared relatively well. The official jobless rate for April was 6.2 per cent, up 1 per cent on the previous month, and in May it rose to 7.1 per cent. However, the ABS has warned that these numbers do not capture the full impact of coronavirus, so it is too soon for complacency. This has also been reflected in the recent Reckon Resilience Report, which found 47 per cent of surveyed Australian SMEs have seriously considered closing their doors permanently in the last few months.

While many have been doing it tough, there are businesses who are thriving, having been well positioned to reinvent themselves or cater to the needs of society in isolation. For others, having a cash buffer or protection against volatile currency swings has been the difference between remaining open or having to close.

Weathering the storm – it’s not over yet

Looking forward, preparedness may well be the single biggest winning factor as to whether a business can ride out the storm and high waves of recession. This is also true for risk management and the approach to international exposure.

From a currency perspective, it is impossible to predict exactly about where

economies will end up, or where their currency valuation will be.

In recent months we have seen a significant trading range, as the Australian dollar hit a 17-year low against the US dollar in mid to late March, before staging a prolonged recovery in April and May.

At present, volatility seems to have subsided and the local currency has a number of elements working in its favour, including US weakness as a result of quantitative easing and elevated iron ore prices stemming from constrained global supply.

However, a number of potential risks remain. The AUD is heavily dependent on a strong Chinese economy. Therefore, the internal tensions between China and Hong Kong, as well as China’s geopolitical tensions with India and the US, have the potential to weigh on the AUD looking forward.

It is also important to remember that our currency has always been considered a risk currency, which is more in favour with foreign investors when times are good.

Many Australian businesses did their FY20 budgets last year when the AUD was at 0.7000 or higher against the greenback. However, the AUD’s recent recovery to pre-coronavirus levels is finding technical resistance at 0.6650.

At the time of writing, we see opportunities for importers to capitalise on current rates, which are well off the lows seen in March.

From a broader perspective, we recommend businesses review their hedging and costed rates every three to six months, rather than focusing on a 12-month strategy that could be derailed in a few months’ time.

For those with international exposure, the businesses best positioned are those that are hedging systematically, ignoring the market and buying currency every two weeks or every month. This has often involved putting a forward contract in place with some optionality, which has been a sensible currency strategy when compared with trying to pick which way the market will go.

Preparing for the “new normal”

One thing that has become obvious in 2020 so far is that many businesses have not aligned their risk management with their broader business strategy or appropriately factored volatile currency movements into their budgets.

In times of turbulence, 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.

Whether you are an importer or exporter, having an appropriate strategy in place will be essential to maintaining competitiveness, efficiencies, margins and smoother cashflow in a post-COVID environment.

Stephen Whitham, APAC head of risk management, AFEX

This story first appeared in issue 29 of the Inside Small Business quarterly magazine

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