The RBA have left interest rates on hold for April as they are faced with the dilemma of cutting rates to devalue the AUD thus appease our key exports versus the rising potential of a housing bubble. These opposing forces are intensifying too, as Australia’s (namely Sydney’s) housing clearance rates are breaking records nearly every week and Iron ore (our largest export) is tumbling to record lows.
Given the fact that the AUD has fallen 21% from September, this has directly led to Australian importers subsequently rising the prices of their goods (the proactive ones earning ‘double margin’ explained in my March release) and as goods become more expensive, inflation increases.
Inflation is one of the RBA’s most important indicators to control (between the 2-3% bracket; currently at 2.1%) and the CPI report is due out on April 22. If this report surprises markets and/or if the mounting economic, political and social factors continue to pressure the AUD then the RBA won’t have to imply such harsh fiscal policy to get what they want.
Future markets have priced in a near certain chance of a 25bp rate cut in May though this may change if Inflation rises, business confidence recedes further or the labour market in the US gets another boost higher.
All in all, the RBA is in a predicament and it is growing more and more difficult for businesses to thrive in such a volatile market. So here are some easy steps to stay ahead of the curve, minimise your businesses risk and ensure that you are in control of your FX exposure.
1. Build a Foreign Exchange strategy into your Business Plan
In this ever-competitive environment FX levels can make or break any business with an exposure. Create a quick SWOT analysis which deals with how the business can thrive at different FX levels. Such as, how is the business going to manage your exposure if your currency falls or rises 10% over the next 3 months?
As detailed in my February article some of the World’s largest companies such as Proctor and Gamble, Pfizer and Bristol-Myers all did not proactively handle their massive future FX exposures and thus fell drastically short of their yearly earnings targets.
2. Invest in a forecasting strategy
Forecasting can be hard for some businesses who have seasonal or unpredictable sales patterns though for any business with a solid trade history, improved business plan/market share or future contract expectations forecasting is a must. There are a number of different techniques that suit different types of accounting practices though all should be closely linked to the FX budget.
3. Establish a Budget Line for your goods
If your business does not have a budgeted rate for your forecasted sales revenue then you must endeavour to organise one in order to understand the exact margin your business is aiming to obtain, plus to track your sales in accordance to currency fluctuations. Understand the impact of changing your prices on your customers and above all, ensure that your budgeted rate is always protected.
4. Fully consider Trade (or import/export) Financing
Many of our clients are taking advantage of Trade Financing through their banks which can be a very effective tool, especially for asset-rich/cash-poor companies. However, the banks aren’t fully transparent on the interest and margin in-built in these activities and companies are often shocked as to the hidden or non-direct costs associated.
A popular way to avoid these costs are by facilitating the currency repayment through a low-cost FX provider who can tailor beneficial repayment structures to ensure you’re dodging the costs and gaining from currency rises.
5. Find a full-service FX provider
There are a growing number of FX providers throughout Australia though your business must ensure that their provider (and your dealer) is fully regulated, provides sound financial advice, is proactive not pushy, has a high security rating and solid reputation.
Call around then create a list of these few providers and compare the success that their clients have achieved. A quick test is to see whether the FX firm asks about your requirements or just simply recommends in-vogue (usually self-rewarding) trades or strategies.
Finally, ask about their hedging capabilities; if they cannot provide hedging products then don’t bother, if they can, get an understanding of whether their products are able to be tailored to your exact needs or just standardized/stock options that only suit a particular type of client.
6. Compare prices and hedging products between providers
When you have the option of choice, take advantage of it. Comparing prices, strategies and contracts is essential in understanding that you have got the best possible deal for your company. Many Australian corporates have been turned off by hedging because they have taken the first product that their bank or broker has showed them without knowing that there is always another option that may be available at a better price, or that better suits your company’s risk profile.
As the Australian economic climate becomes more difficult companies much search for any possible way to not only protect their exposure and business, though better position themselves amidst fiercer competition.
The author of this article, Ellis Taylor, is the Deputy Head of Sales, Corporate Foreign Exchange for World First Pty Ltd. You can contact Ellis directly on (02) 8298 4903 or Ellis.Taylor@worldfirst.com