How to help protect your business from currency loss

3D finance graph – currency collapse – Australian dollar

Certain known events can trigger market moves, such as worsening global trade relations, or economic downturns but the market doesn’t always react as expected. Then, there are the events nobody could predict, such as COVID-19.

Research by East & Partners revealed Australian businesses suffered currency losses of up to AU$3.4 billion in the previous six months from April 2020.

The impacts of COVID-19 and continued volatility of the Aussie dollar kept numbers high. From March to September 2020, eight in 10 (77.6 per cent) businesses experienced FX losses, with micro and SME importers and exporters reporting average losses of $6.2k and $13.9k respectively.

Exchange rates represent one of the major risks for cross-border trading. A sharp rise or fall in a currency can significantly impact costs and profit. For exporters, it could mean receiving less of your local currency than originally intended. For importers, this could result in paying more for goods than you’ve planned to sell them for, impacting profit margins.

Volatility is inevitable so it makes sense to plan and consider your global money transfer needs. That way, when currency swings present opportunity or you need to act quickly to defend against rates moving against you, you can feel confident and in control.

Here are three things to help set you up on the right track:  

  • Understand your needs
    Are you time or price-sensitive? What is your attitude to currency risk? Being aware of your needs will help you determine how to play the currency market.
  • Set a goal
    What is your target rate? Is your expectation realistic? Setting goals will allow you to identify when the timing is right for you and make more rational decisions, as opposed to emotional market-led decisions.
  • Have a plan
    Have you decided on a target rate but don’t want to watch the markets? Or unsure about the current environment but ready to transfer? Or do you regularly trade with overseas suppliers? Adopting risk management solutions can help protect you from adverse fluctuations.

To get started, here’s a glossary on common FX terms to help you better understand it.

Common FX terminologies

  • Base currency – is the currency that is used to quote all the trades in FX Market, usually the USD.
  • Budgeted rate – is the exchange rate that a company’s financial management uses to draft budgets and establish business objectives.
  • Currency risk – refers to the risk of incurring the losses that ensue from any unfavourable change of the exchange rates.
  • Foreign exchange or Forex, FX – is the international market exchange – meaning the buying of one currency and selling of another at the same time.
  • Forward rate – is when the foreign currency rate is fixed at the time of the deal with a value date beyond two business days.
  • Forward contract – is an agreement that allows you to fix an exchange rate for a future transfer (between two days and 12 months) so that you know what the exchange rate will be when the transaction occurs.
  • Hedging – is a transaction that protects an asset against the fluctuation in the FX rate.
  • Settlement – is the physical exchange of one currency for another between the dealer and the client.
  • Spot rate – also known as Spot FX, is the exchange rate quoted for the sale of currency with a value if two business days.
  • Value date – the date that settlement is due for an FX contract.
  • Volatility – is the measure of how a market’s prices change.

Once you understand the basics, you will be able to apply this when chatting to currency experts that can provide support and tools for cost management and security for long-term growth.

Michael Judge, Head of Australia and New Zealand, OFX