The Australian dollar’s rise to record levels against the greenback is taking a heavy toll on Australian exporters, with some taking a direct hit to revenue of as much as 15%.
The Australian dollar was trading at US95.35c at 10.45am today after reaching a 24-year high of US95.71c overnight. The market consensus is for the Australian dollar to keep rising, with many economists predicting the two currencies will reach parity by the end of the year.
The rising dollar is a huge problem for exporters because it increases the relative cost of their products for overseas buyers, forcing them to either lift prices or slash margins.
Brisbane-based driver training simulation business Vigil Systems does between 60% and 70% of its business in the US. Chief executive Ian Haynes says the recent rapid rise of the Australian dollar has resulted in an immediate 15% hit to the business’s profit margins.
“We’re still profitable despite the dollar hike, but it certainly would’ve been nice to have that money in our bottom line. We’ve only been profitable for the past two years and it hurts to have that profitability wiped out by this and the recession in the US as well, so we are losing our margins and the market is slowing down there,” Haynes says.
However, it is not businesses exporting directly into the US that are being hurt by the stronger Australian dollar. In many countries, particularly in Asia, contracts are either denominated in US dollars or the value of the local currency is connected in some way to the greenback.
Sydney-based logistics software business CargoWise edi has seen its margins reduced on export contracts both in the US and other markets around the world.
“So many of our contracts are struck in the US dollar – for example we sell into the international supply chain and all freight there is denominated in US dollars,” chief executive Richard White says. “We entered one contract recently around the $4 million mark, and if the US dollar continues to move as it has recently it could be quite devastating, but even in current terms we will see a reduced margin.”
The rapid rise of the dollar is causing more and more businesses to employ hedging and offshore trade accounts in an attempt to minimise their exposure to currency moves.
Lynda Slavinskis, a lawyer who regularly advises exporters, says she is seeing more and more businesses using trade accounts; accounts used to receive income and pay expenses denominated in foreign currency without the need to exchange that money into Australian dollars.
“A lot of people are dealing entirely in US dollars. They import from Asia and then ship products to other countries; in many cases they started doing it because it was easier and now these dramatic currency fluctuations have increased its appeal,” she says.
As Slavinskis points out, however, while that strategy can be effective in delaying the impact of negative exchange rates, eventually foreign currency profits will have to be exchanged and put back into the business.
“The accounts do help you keep foreign currency separate from the Australian dollars that go to the bottom line, but at the end of the day you have to convert,” she says.