The Australian dollar has already fluctuated significantly this year, but overall, a slide is predicted for our dollar in 2018. With a weaker AUD, small to medium-sized businesses (SMEs) working in overseas markets should begin to look for ways to protect their business from potentially volatile currency movements.
It only takes a small difference in rates to hit margins and increase costs for Australian importers and borrowers of overseas funds. A bad week for the AUD can see it lose as much as 5 per cent of its value. These costs can occur without warning, which, for some SMEs, can leave them vulnerable if they have not adequately prepared for the uncertainty of foreign exchange rates.
It’s important all businesses develop their own individual strategy to help navigate changes in our dollar. Some businesses regard the constantly fluctuating foreign exchange market as a profit opportunity, while others protect against the uncertainty by fixing current rates through forward contracts for a set period of time. Weighing up and actively managing these risks is key to business success when exchanging money between currencies.
A US recovery may hurt Australian importers
While the Australian dollar has been fluctuating this year, when the Dow Jones plunged 4.6 per cent in February, the AUD fell to 0.78 USD. This saw the AUD suffer its worst weekly fall against the greenback since November 2016, amounting to yet another slide by the Aussie dollar against its US counterpart this year. And, with another two, or possibly three, interest rate rises expected out of the US Fed in 2018, the AUD is likely to continue to bounce between 0.83 and 0.71 US cents.
Inevitably, a US recovery will hurt Australian SMEs importing from overseas with a USD exposure. While our economy is firing in some sectors, our low wage growth and high household debt are causes for concern for both the government and the Reserve Bank.
Moreover, if economic growth slows domestically, and major economies such as Europe, UK, US and Japan all continue on their recent strong growth trends, it could be foreseeable that Australian importers and overseas borrowers would feel the pressure of a weakening AUD over 2018.
Euro predicted to strengthen
Late 2017 and early 2018 has presented dramatically improving economic conditions in major economies, particularly in Europe. With the European Central Bank planning to end its bond buying program in Q4, the Euro is placed to being one of, if not the, best performing major currency this year. SMEs dealing in the European market may want to consider budgeting for a weaker AUD/EUR exchange rate and consider exchanging their dollars now before the Euro potentially strengthens further.
Volatility in the UK to continue
For those SMEs with UK ties, the feeling of vulnerability is all too familiar given that the mode and timing of Brexit is still up in the air. To add to the uncertainty, the pound is likely to be just as volatile in 2018. While some areas of the UK economy are showing strong signs of growth, it is a fear of the unknown that will cause the GBP to fluctuate throughout the year. And, with genuine uncertainty surrounding AUD/GBP exchange rate movements, Australian SMEs in the UK market – especially newcomers – should be increasingly watchful of currency movements.
While the Australian dollar was sitting comfortably on 1.05USD in 2013, it has been on a downward trajectory since. Indeed, this is not the year for SMEs to be complacent. It is imperative that, over the next six months, Australian businesses consider hedging strategies to lock in current exchange rates.
To be successful, Australian businesses should also remain highly attuned to the foreign market, including world events. The United States current trade tariffs are recent events causing dramatic fluctuations in major currency pairs.
Risk-mitigating strategies and tips for SMEs selling or buying from overseas
With this outlook set for 2018, it’s important that SMEs set a budget rate when forecasting to prepare for shifting exchange rates. A contingency plan – one that takes into account the worst-case scenario – will help businesses minimise the impact on income and create a more accurate expected revenue figure. A good currency specialist will recommend setting the budget 5 per cent below the current exchange rate, but this figure can range depending on a business’s personal circumstances and ability to wear negative currency movements within their profit margins.
Setting and reviewing a budget rate will allow some room for negative currency movements. Whether you are an SME already dealing in the foreign market or an SME looking to send and receive money overseas, it’s best to speak to an experienced currency exchange specialist to help you set an accurate budget rate.
Secondly, consider hedging contracts. To avoid vulnerability if exchange rates turn negative, particularly if a business is not knowledgeable or accustomed to foreign currency trends, having the ability to fix an exchange rate for a required set period of time can be extremely valuable.
Some money transfer services, such as WorldFirst, will allow you to lock in the current rate for up to two years in advance. Though this lowers risks if the exchange rate worsens, it can also prevent a business from taking advantage of favourable exchange rate movements, so speaking with a foreign exchange specialist first is advised.
Alternatively, if a business is not happy with the current rate and is not in a rush to make a transfer, they can also place a firm order in the market targeting a rate they wish to achieve, and if the market improves a purchase will automatically be made on their behalf at this targeted rate. It’s imperative to get good advice on whether an exchange rate is adverse or favourable considering the circumstances, to help you make the right call on when to lock in rates, delay payments or bring them forward.
Last, but not least…
Beware of banks… and honeymoon rates
Banks often impose a heavy margin above the actual exchange rate or interbank rate. By using a money transfer specialist instead, SMEs could save $200-$250 for every $5,000 on a typical AUD to USD transfer. Some banks and other money transfer services can also offer introductory or ‘honeymoon’ rates. These rates initially offer zero commission (to win business) but the catch is that they tend to only last for a limited period of time before increasing to a rate that can be higher than average. Unlike the big finance companies that offer numerous services, WorldFirst is a fintech that specialises in international money transfers only, enabling it to be purely focused on providing better-value money transfers and the care of its customer base of individuals and small-to-medium businesses. This allows WorldFirst to offer exchange rates that are up to seven times cheaper than the four big banks.
Patrick Liddy is the Head of Foreign Exchange at WorldFirst, a global leader in international money transfers.