There has been much talk and speculation recently with the Australian dollar hitting parity twice with the US dollar in the last month alone (the last time parity occurred was in July 1982).
The US is Australia’s second largest recipient of exports, behind New Zealand, and many of our Asian export partners trade in US currency, so the simple reality is our higher dollar is having a severe impact on Australia’s exporting community.
Many of our exporters are SMEs and are the most vulnerable when it comes to fluctuations in exchange rates as they don’t have the same financial buffer of larger companies.
Unless they locked in contracts when the dollar was lower earlier this year, many of these businesses will be seeing a tightening in their margins and what really isn’t helping matters is, the continuing difficulty for them to access finance from the big banks.
For exporters raising prices is not always an option, particularly if they are importing into a fiercely competitive market, like consumer goods. But some things they can do are:
- Become more competitive and think about how they can differentiate their product so customers perceive more value in the brand rather than increase your prices. For example provide better customer service that clients are happy to pay for
- Look for new markets where demand for their product is strong.
The dollar value won’t stay high forever, and managing currency risk is part-in-parcel of being an exporter. Managing risk has a lot to do with planning and budgeting to try and minimise that risk and ensure the business benefits from favourable exchange rate movements and isn’t exposed negatively when movements aren’t so favourable.
Because exchange rate volatility also provides the opportunity for gains, it’s a good idea to try and strike a balance between risk and return. For instance:
- You may want to ‘forward foreign exchange’ meaning you can lock in an exchange rate for a specific period of time in the future
- Or you could do ‘flexible forwards’ meaning you can protect against adverse exchange rate movements
- You could always take out currency options which provide you with the option with the right (but not the obligation) to buy or sell one currency amount at a specified exchange rate on a specified date.
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