We went from recession to recovery at whiplash speed in 2020. And every time the Aussie dollar goes up or down, so do the profits and losses of businesses with foreign exchange (FX) exposure.
Heads up for those SMEs: Steven Dooley, currency strategist at Western Union Business Solutions, says they think the Australia dollar could hit US$0.80 next year, but — well, there are a lot of buts.
For example, will the COVID-19 vaccine prove successful? How will Brexit affect European markets and trade in the UK? What about bubbling geopolitical tensions between China and the US and Australia? And all the other question marks hovering over global economies, as laid out in Western Union’s report Are you ready for 2021?
There’s no way out but through, so here’s what to expect next year — and how to manage all the uncertainties.
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Confidence high for a strong recovery
More than 90% of countries could see their economies shrink this year, Western Union’s report says, while emerging markets collectively face their first year without growth in at least 60 years.
Sounds bleak. But the performance of the Aussie dollar tells another story.
Our national currency is traditionally closely tied to global growth expectations, Dooley explains, so we know that within stock markets at least people seem to expect a strong recovery.
“Before COVID-19 hit, the Aussie dollar was buying US$0.55, now it’s at its highest level in two years,” he says.
“And after the Federal budget was released in October, Australian consumer sentiment jumped 32%. So it’s incredible to think people feel more confident now than at the start of this year, when things were looking pretty good.”
But it could go either way
Historic low interest rates and record government stimulus spending are contributing to this rosy outlook, but could be building what the report calls “a false sense of optimism”.
If the economy is an inflating balloon, there are lots of pins around that might prick it, including all the uncertainties and risk factors mentioned above. And with so many possible futures ahead of us, we’re at a pivotal point.
“If people still feel confident going into next year, the Aussie dollar could hit absolutely rocking highs, but if things go bad, it could fall very sharply,” Dooley says.
“Any business with FX exposure needs to recognise how much the fluctuating Australian dollar can impact their profits and their cash flows, and to know that we expect it to be more volatile in 2021.”
Balancing flexibility and FX exposure is key to managing volatility
With so much forecast uncertainty, the best thing SMEs can do is embrace it, Dooley says, while trying to embed as much flexibility and agility into their business as possible.
Here are his top tips for next year:
- Plan ahead, twice. On an average year the Aussie dollar fluctuates by 19%, Dooley says. So from our current starting point we can expect it to fall between US$0.60-0.80 in 2021. Have a plan in place for what happens at each end of the range.
- Balance short-term market protection against long-term flexibility. With the Aussie dollar at its highest rate in years, it might be tempting to lock them in with forward contracts long-term, but doing so means you could miss out on taking advantage of positive changes to the market.
“It’s different for every company, but in general only being protected for three months is important, giving you that flexibility over month four, five and six,” Dooley explains. “Because we just don’t know how things are going to play out.”
Just like this year, outperforming next year will depend heavily on your ability to react quickly to changing market conditions, not just in terms of FX exposure but also in a broader sense. For example, being able to go after new markets, or if you’re not sure of demand, ordering stock three months in advance instead of six.
“Having the ability to adapt and to identify new markets is going to be critical again next year, as we adjust to a rapidly changing world,” Dooley says. “That’s been the whole story of 2020, and likely to be the story for 2021 as well.”
Western Union Business Solutions enables companies of all sizes to send and receive cross-border payments and manage foreign exchange. With deep expertise in moving funds worldwide and access to more than 130 currencies, Western Union Business Solutions helps companies spend less time managing international financial transactions and more time growing their businesses.