Are you exposed? A global economy means currency volatility affects almost all businesses

Are you exposed? A global economy means currency volatility affects almost all businesses

Importers and exporters naturally feel the pinch (or reap the rewards) when the dollar takes a sharp turn, but what about other businesses that don’t directly import or export goods and services?

The reality is that currency volatility affects all businesses, often in ways they might not realise.

 

Indirect exposure

 

Your suppliers and customers may all be Australia based, but what about their suppliers? As we’ve seen with the recent frozen berries health scandal, many components of products manufactured and marketed in Australia actually come from overseas without people realising.

Services you buy from Australian companies may rely on overseas labour or data centres, forcing your suppliers to increase their prices and thus your costs.

 

Changed competition

 

If your competitors have to raise their prices because they are directly exposed to overseas currency fluctuations, they may adopt different strategies to win business going forward.

If your unique selling point is “local” or “high quality”, and theirs is “cheap” based on low-cost Asian imports that have now soared in price, they may change tack and start edging into your territory instead. So even though you were hoping that consumers would flood back to your store, they may not do so and you may be challenged for some of your existing market share.

 

Cash-strapped consumers

 

Customer behaviour is also something to bear in mind in volatile economic times. While rate cuts should theoretically put more money into pockets, issues such as rising unemployment deliver a harsher blow than a rate cut cushions it. If you’ve just lost your job along with several thousand dollars of income a month, saving a couple of hundred bucks on your mortgage repayment is merely a drop in the ocean.

Price rises elsewhere are also problematic. Even if you don’t have to put your own prices up when the dollar weakens, you may still find your sales fall. Your customers are facing higher costs elsewhere and their budgets are limited. If clothes and electronics or household necessities are getting more expensive, they will look to tighten their purse strings elsewhere. 

 

Overseas travel

 

Your budget for any overseas business travel, whether meeting partners or attending a conference, just blew out. While you might suppose that air travel prices should fall now that oil prices are plummeting, there’s no sign that’s the case. Instead, analysts expect airlines to keep prices high and use any surplus to pay down debt or reinvest in their businesses. At most they may pare back fuel surcharges on long haul flights.

You can mitigate escalating travel costs by buying up currency in advance, for example, if you anticipate further falls. Pre-paying accommodation costs in foreign currency via an international money transfer service is another option. It’s usually cheaper than paying with Australian dollars, as hotels may put a margin on the exchange rate.

 

Future expansion

 

Even if you’re not currently directly exposed to FX fluctuations, perhaps you are planning to be. If you intended to expand overseas this year, or start importing foreign goods, your business projections would need adjustment and may no longer be viable.

Perhaps this isn’t so problematic for you: you can just put your plans on hold. But what if competitors are still forging ahead with their globalisation strategy? Alternatively what if foreign companies, attracted by lower labour costs in your country, set up shop and encroach on your territory?

So if you were sitting by, feeling peachy at your lack of currency exposure as the Australian dollar tumbles, think again. All businesses are now part of the global economy and can be affected by events overseas.

Will Shepherd is treasury manager at OzForex, a global supplier of online international payment services and a key provider of Forex news.

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