Three ways the stock market could be impacting SMEs’ profit margins

Stock Market Diagram. Showing a graph with figures.

Shocks, volatility and the actions of politicians and central banks can sway the performance of the Australian dollar and global currencies in an instant. For SMEs engaging in cross-border trade, understanding the trickle-down effect of the stock market and global events on the currencies your business operates in can have a significant impact on your bottom line.

Here’s what you need to know to anticipate which direction current markets will move and, therefore, help you leverage foreign exchange movements to benefit your business:

Safeguarding against market shock

It’s helpful to understand the relationship between the stock market and currencies, as they are largely influenced by each other’s movements. A political disturbance, economic shock or natural disaster can spook investors and FX traders, which can then affect market and consumer sentiment.

The COVID-19 pandemic is perhaps the epitome of such a shock, with many Australian businesses seeking out currency certainty when feeling the initial economic impact.

These shocks, however, can also work in SMEs’ favour. For business owners wanting to jump on a favourable on-the-day rate for a single transfer overseas, it’s possible to exchange funds at the current spot rate with a simple Spot Transfer.

Tackling currency volatility

Each currency performs differently depending on the local and global stock market volatility and the economic cycle. On top of this, the pandemic will likely cause an ongoing economic ripple effect for SMEs, customers and communities, making it crucial for businesses to protect their profit margins against volatility.

For example, when the Dow Jones was falling to its lowest level on March 23, the US dollar strengthened 5.9% against the Australian dollar, from AU$1.63 on March 16 to AU$1.73 on March 21. That means any Australian company that was looking to buy, say, US$50,000 of goods from the US would have had to pay an additional A$4,780 for the products within a matter of five days. For many SMEs, this would potentially have been a cost they couldn’t afford to bear.

Planning can safeguard business cash flow. A Forward Contract, for example, can fix a currency rate for a future transfer for up to twelve months, helping to create more certainty on FX costs.

Monitoring key players

The actions of central banks and politicians both locally and abroad are other noteworthy events that stock and currency markets respond to, so it’s worth having a working macroeconomic view when developing your company’s approach to paying overseas suppliers or shifting products in global markets.

The upcoming US elections, in November, and a hard Brexit, at the end of the year, are examples of events that can potentially affect sentiment across all markets. Closer to home, the decisions made by the RBA to either cut interest rates or inject money into the economy to stimulate spending, can also have a flow-on impact on the currency corridors your business trades in.

Working with a currency expert to lock-in favourable rates could mean the difference between profit and loss for companies running on lean operations. Using a Limit Order, a tool that allows businesses to book a money transfer at a target exchange rate, could provide peace of mind that your bottom line is protected against any dramatic market swings.

Taking action

It’s important to understand that nothing in currency markets happens in isolation. This current volatility has demonstrated the importance of having currency hedging as a key part of business strategy, pushing many businesses into basic risk-management products. By working with a currency expert, you can understand the foreign exchange tools available to help you manage your business’ FX risk and get currency certainty.

Michael Judge, Head of Australia and New Zealand, OFX