There’s speculation that the Reserve Bank of Australia is going to have to bring the cash rate below 2% to cope with plummeting oil prices. Markets are currently pricing in a 70% chance of a rate cut this week (the RBA meets today), which would bring the cash rate down to 2.00%, a historic low.
Collapsing commodity prices are already driving the Australian dollar down, a rate cut will cause it to fall even further and that’s before you consider the chance that the US Fed may decide to raise rates this year and boost the Greenback. So what does this all mean for your business?
There is hardly any product or industry that doesn’t involve overseas suppliers: whether for materials, components or outsourced services such as labour. Small businesses often feel more pain from currency fluctuations because they don’t have the tools and strategies in place that large corporates do, nor the scale to absorb fluctuations.
If you have bills to pay in foreign currency, they’re about to get a lot more expensive. A $US100,000 order signed six months ago would have cost you $A110,000 to pay. It will now cost you $130,000.
The best way to defend against this kind of bill shock is by hedging. A forward contract is a hedging tool that allows you to lock in your rate now and deliver your funds at some point in the future. It provides protection against the value of the currency moving against you down the line.
It may also be worth locking in prices ahead with suppliers and even buying excess stock before prices rise further. Wholesalers have already been raising their prices for this quarter, and there will be more hikes ahead.
Cashed up consumers?
With mortgage payments falling and oil prices also tumbling, the theory is some consumers will have more money to spare. They may also be tempted to spend rather than save as savings accounts will offer minimal returns.
On the flip side consumers will also be facing higher prices. The notorious “Australia tax” – a term applied to the generally higher prices of goods and services here, compared to the equivalent goods overseas – will grow further as AUD/USD sinks. Rising unemployment may also cause many Australians to tighten their purse strings.
Inbound tourism to surge
Australia is finally becoming more affordable again for tourists. That includes both foreign tourists and Australians deciding to take a so-called ‘staycation’. Companies in the local travel sector, including those providing services to them, may enjoy a nice boost in business.
But the cost of any business travel you had planned just escalated. Analysts aren’t expecting airlines to cut ticket prices despite fuel costs falling. If you need to pay for overseas travel it may be wiser to do so sooner rather than later, bearing mind that there can also be discounts offered for paying in advance. Paying directly via an overseas money transfer service will likely be the most cost-effective way to do this.
Longer term, some economists are tipping interest rates to rise again as soon as the end of this year, due to the stimulus from the falling dollar. If that happens the Australian dollar may also firm up again, and the cycle may tip the other way. But a stronger dollar in 12 months won’t help you pay the bills now.
Will Shepherd is Treasury Manager at OzForex, a global supplier of online international payment services and a key provider of Forex news. OzForex Group Limited is a publicly listed entity with shares traded on the Australian Securities Exchange under the code “OFX”.