How to survive a volatile $A

How to survive a volatile $A

The September fall of the Aussie dollar of more than 6% in two weeks will bring much-needed relief to many businesses who have long struggled with a strong exchange rate. However, spare a thought for importers, for example, who costed the dollar at US90c back in August.

Although predictions vary about where the dollar might go from here, from as low as US75c to even back up to US90c, one thing is certain – the wild ride will continue.

The threat to Australian businesses is real. According to a recent Western Union Business Solutions survey1, 43% of SMEs are negatively impacted by currency movements. Also of concern was that only 15% of SMEs regularly check the currency markets, so in essence are ‘riding the waves’ of foreign exchange rates.

So, what can Australian businesses do to protect themselves from exposure to our volatile dollar?

1. Do nothing

Yes, waiting and hoping is actually a decision. But it is also high risk. Remember, in April 2013 the AUD fell 20% in four months. So ask yourself this question: What would a 20% hit to my gross margin mean to my business?

Ask yourself this question: What would a 20% hit to my gross margin mean to my business?

If you do choose to do nothing it is wise to have a back-up plan. For example, make a decision on an exact level in which you will get active again. But make sure that if in fact we get back to your desired level – you stick to your guns and place the order. On the flip side, pick a downside level where the panic button is hit, and again, stick to it.

Having no plan could turn out to be the worst decision, so make sure you plan in advance.

2. Get a fixed exchange rate to eliminate unfavourable risk

While locking in a rate below your costing rate might not be the most desirable outcome, the move lower in the AUD has made it impossible to currently achieve 0.9000.

You can easily remove the risk of further unfavourable currency movements by taking a forward contract, which will fix your exchange rate, giving you 100% certainty on the exchange rate you will be dealing at the date you wish to exchange the currencies.

Of course, the market could rally and bounce back, however, the fixed cost rates might not be far off your desired levels, but most importantly you will have created certainty for your business. Furthermore, dates and amounts can be tailored to meet your requirements.

If the AUD continues to fall, this is the cheapest form of hedging.

3. Book a flexible product that removes the risk but also allows you to capitalise on a market recovery

A number of strategies not only provide 100% protection, but also allow you to in fact benefit from any favourable FX movement.

By utilising an option structure, you gain both flexibility and the potential to achieve your costing rate if the market moves back in your favour. However, with this give-and-take approach, the result is a protection rate that will be lower than that of a fixed exchange rate.

This is a defensive hedging strategy as it gives you the fighting chance to achieve an overall rate above 0.9000 if the market stabilises and moves higher from here. It creates certainty as there is protection at all times with a known protection rate, and allows you flexibility to manage your cashflows.

So, in a world of ever-shifting currency rates, ensure you effectively manage your cashflow levels and profit margins to create certainty and remove the risk to your business.

1. The research, conducted by East & Partners in June 2014, surveyed the international trade and foreign exchange practices of 2380 Australian SMEs that import/export in Western Union Business Solutions’ proprietary study. The research categorised businesses based on an annual enterprise turnover of up to A$100 million. A second round of research will take place in December 2014 with a full report due for publication in 2015.

Justin Logan, Country Manager, Western Union Business Solutions