Currency lessons for SMEs

Global currencies are constantly fluctuating and can be noticeably impacted by geopolitical issues and economic performance. 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.

To help plan for 2019, we look at some of the lessons that can be learned from 2018.

1. Consider the China factor

2018 has been a trying one for the Australian dollar, a notoriously speculative currency, which has fallen around 14% against the greenback since January. The stock market crash in the US in January, which ricocheted across global markets, spelled the tipping point for the AUD, which plunged from 0.8115 to 0.7787 by early February.

Another major contributor to the AUD’s weakness has been the US-China trade tensions, which contributed to a drop in the local currency in April. The AUD was hit again in June, when we started to see a slowdown in China’s activity as a result.

In recent years the performance of Australia’s economy has become increasingly interlinked with that of China, which represents one third of the nation’s exports. It is therefore important to factor in China’s fortunes when considering the outlook for the AUD.

2. Don’t bet on a rate hike

Another theme that has been adding to the AUD’s woes has been the increasing gap between the RBA’s benchmark interest rate and that of the US Federal Reserve.
The RBA’s decision to keep rates at a record low of 1.5% for the 29th consecutive month in December 2018 could be considered a backflip on its rhetoric in late 2017 and early 2018, when it repeatedly issued statements that the next rate move would be up.

The RBA’s “hands-off” approach is in marked contrast with that of the Fed, which has steadily increased its benchmark rate three times this year to 2.25%. Naturally, the AUD currently has less appeal.

3. Prepare for the unexpected

What is clear from the events of this year is that currency markets can be unpredictable and business owners should prepare for a move in either direction. While the AUD has made up some of its losses, looking to 2019 it could experience further falls. We are currently coming to the end of the global growth cycle, which historically has been detrimental to the AUD as investors flock to “safe-haven” currencies.

For importers, they may be realistic about the levels that are achievable in the current market and implement some hedging, with a degree of optionality to capitalise on any further bounces.
Conditions this year have been more positive for exporters, many of whom have been able to lock in forward contracts at attractive rates. For exporters who have not already done so, hedging now can put your profit outlook in good shape, ahead of any potential AUD rise in the coming months.

4.  Seek strategic advice

The currency markets are full of risks and opportunities for SMEs and managing these can be a full-time job. It’s best to consult with an expert 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.

The most appropriate currency risk management strategy considers 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, Account Manager, AFEX

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