While the RBA may be cheering the lower Aussie dollar at the moment, the recent weakness in the currency does not bode well for those businesses reliant on imported goods. A drop in the value of the Australian dollar is eroding the purchasing power of local businesses at a time when they can least afford it.
The steadiness in the Aussie dollar for the majority of the calendar year has provided some much needed stability for businesses but this is changing quickly. In the last week alone the cost of goods imported in US dollars rose 5%. Unless the rise can be absorbed then inevitably these costs will be passed on to consumers in the form of higher retail prices.
Can businesses absorb higher costs?
Since the GFC, the Australian economy managed to dodge a recession and as a consequence some businesses were not forced into pushing for efficiency gains to the same extent as they have in other countries such as the US. Whilst there may still be some operational improvements to reduce costs and remain competitive, most businesses will struggle to be able to absorb the increased cost pressure from a lower Aussie dollar – whether they import directly or not.
It seems inevitable that businesses will be forced to pass on higher costs by raising prices unless they can find a way to cap increasing costs.
Will consumers pay more?
Recent economic data tells us that despite the record jump in employment, business and consumer sentiment are both fragile. One might argue that more people employed means more money being spent by consumers. But this usually only holds true if people are confident about their future prospects and are thus prepared to spend more – which they are not.
In addition, given the huge increase in employment came from those employed only part-time, it’s unlikely the benefits will flow through as strongly as they would if the gains were in full-time employment. Making matters worse is the fact that wages are not even keeping pace with the rate of inflation, rising only 2.6% annually compared to CPI at 3%.
So I don’t believe consumers are willing to pay more for discretionary goods, and even if they do have any capacity to do so they are more likely to want to put this into paying off debt.
Putting a lid on rising costs
The US dollar has been strengthening for several months now against the euro and Japanese yen but only in the last week or so has this affected the AUD/USD. Most businesses are not aware that they can put a lid on the increasing cost of international trade by locking in the Australian dollar exchange rate for future invoices.
Much like a buy now, pay later arrangement, businesses can pay future dated foreign currency invoices at today’s exchange rate with the use of forward exchange or option deal. In the case of a forward deal the business can lock in today’s exchange rate, say 90 US cents, and deliver USD in 2015 at this rate, regardless of where the currency may be at that point in the future. For example, if the Aussie dollar falls to 80 cents, by transferring at 90 cents the business would save almost $7000 Australian dollars for every $US50,000 transferred overseas.
By putting a lid on the cost of imports, businesses may not have to increase prices. This not only helps retain existing customers but also assists in winning market share as competitors without such a strategy are forced to put their prices up.