Global currencies are constantly fluctuating and can be noticeably impacted by geopolitical issues and economic performance. Even the slightest currency movements can have an enormous sway on profits.
In the first few months of 2020, SMEs have already had to contend with uncertain trading conditions, with the coronavirus outbreak impacting currency markets. While the long-term impact of the coronavirus remains to be seen, we are already seeing effects on tourism numbers from China at a time when the industry is already being hurt by bushfires. Impacts will also be felt as ports are disrupted, and production and consumption levels in China halt the amount of Australian imports.
Key takeaways for importer and exporter SMEs
When considering your currency position for the coming months, businesses that are importing goods or production inputs from China can consider some flexibility around their hedging in case of trade disruption. Disruptions linked to the coronavirus outbreak have left many Australian SMEs unsure as to when their shipments are due to arrive.
For importers generally, it is important to remain systematic about hedging and keep protection in place. It can become tempting to stop hedging and wait for the currency rate to go higher, but over the last two years, companies that have done so have routinely been punished as it has gone lower.
Some businesses may also need to review their budgeted exchange rates. With the AUD going above 0.7000 in both June and December, when a lot of companies do their budgeting, it has caused many businesses to be optimistic about where they are setting their budgeted rates, and these may now need adjustment.
For exporters, it’s important to remember not to get greedy. Keep doing what you are doing and putting protection in place because if the cloud around the coronavirus clears, the AUD could well round above 0.7000, especially if the Australian housing market continues to recover.
Preparing for the unexpected
What’s clear from the year so far is that currency markets can be unpredictable and business owners should prepare for a move in either direction.
The currency markets are full of risks and opportunities for trading SMEs. Managing these risks and trying to predict market movements can be complex and a distraction from day-to-day business activity.
It’s best to consult with a foreign exchange provider throughout the year who understands your industry and can provide relevant currency market insights and analysis, as well as gauge what market shocks may be around the corner.
The most appropriate currency risk management strategy considers your level of activity, market exposure, risk appetite and budget flexibility.
By putting steps in place to mitigate risk and capture opportunities, you can remain focused on what matters: the growth of your business.
James Swerling, senior dealer, fund and institutional sales, at AFEX