The Australian dollar has taken a tumble over the past couple of years. It’s 21% down from its record above-parity highs with the US dollar and in the last 12 months alone it’s down 8%. Many economists predict a further fall to around 75 US cents.
Companies hurt by a weak dollar
For businesses with a significant offshore presence, or who deal extensively with overseas partners, customers and suppliers, this volatility can be a big issue. For importers, everything is suddenly getting more expensive, from raw materials to transport.
If the trend continues, companies importing electronics from Asia or the US are going to find they have to put their prices up at some point, which of course customers don’t like. Customers have limited budgets: they’re not getting pay rises to compensate from the dollar’s reduced overseas buying power.
A “natural hedge”
If your company is involved in both import and export, with cash flows in two directions for the same currency, you may have a natural hedge in place. Perhaps you source raw materials in euros, and sell the final goods in euros.
Although it’s unlikely to be a perfect hedge down to the last cent, as the two cash flows rarely match exactly, the risks are a lot lower. There may be some timing issues if you don’t hedge, but you’re in a much safer position than businesses who only have cash flows in one direction. To take advantage of these natural hedges, many businesses open foreign currency bank accounts so they can hold balances without needing to convert every time.
For example, an Australian business may be involved in both import and export and as such have cash flows in two directions for the same currency (i.e. they both receive and pay the same currency). This could be because they source raw materials from overseas in US dollars, and sell their finished products overseas for US dollar payments. They can receive and hold USD in their bank account and then pay USD out of that same account when the time comes.
Be aware, however, that running these bank accounts can be quite expensive as the fees are high and it is not recommended unless there are frequent currency flows.
Consider your payment cycle
If you have short-dated payment cycles and operate in a high margin environment, you may also enjoy less downside as you can build an FX margin into your pricing. Within the short time frame, any extra margin or reduced margin is limited from an adverse currency movement.
On the other hand, if you have large, foreign currency denominated bills to pay in a few months, it would be wise to consider some kind of hedging product. Otherwise you could be stuck with a bill that’s much larger than you anticipated and you can’t pay. It’s far better to plan for the most difficult situation while you’re in a healthy position, than act out of fear and desperation at the last minute, when your options are running out.