If you're an importer, or planning a trip to the US, the Aussie dollar's strength is good news. If you're an exporter, it's probably less so. Variations in exchange rates are a given for import/export industries. There's no avoiding them. Instead, you need to manage them.
At present there's certainly management to be done. Over the last two decades the Australian dollar has averaged around US71c. Its current strength, pushing through US102c in January, is unprecedented. But there are good reasons for it.
Our economy is robust — as was demonstrated by the relatively mild impact of the GFC compared to many other developed countries — and we're rich in commodities. Australia is the world's largest exporter of coal, wool and iron ore (amongst others), and commodity prices are high and expected to keep strengthening on the back of demand from China and India.
But it's not just about our economy being strong; it's also about the US being weak. As a stream of unimpressive economic data comes out of the US and Europe, investors look elsewhere.
Our comparatively high interest rates, sound economic growth and good governance combine to make Australia an attractive destination for foreign investors. And up goes the dollar.
While you certainly can't control exchange rates or the impact they have on your business, you can make sure that you are getting a reasonable deal on foreign exchange (FX). If your business exports or imports, you may use one or more FX providers for transactions. Costs involved will include the margin (the provider's profit on each transaction) and usually a fee per transfer. A number of online FX providers now offer fee-free transfers, which can be attractive, but make sure you're getting a decent rate as well because a low or non-existent transfer fee does not make up for a poor exchange rate.
As with any provider relationship, the client who asks for more generally gets it. If you get your FX through your bank, would you be better off with a specialist provider? Or vice versa — could your existing bank relationship get you a better FX deal?
Make sure that transactions are traceable and that security measures (such as passwords) are in place to protect your transactions.
It's not just the exchange rates you get from your FX provider that are important.
Contracts that you make to supply or purchase goods — and how those contracts deal with currency fluctuations — are crucial. Any such agreements should contain clauses specifically dealing with the issue of exchanges rates, and should include details of the percentage variation in the exchange rate at which the price for goods will alter. Timing is also important — at what point in the purchase process is a final price locked in? Is it at the time of a quote, the time an order is placed, or delivery? The trade relationship you have with the other party may also influence the contracts you sign with each other. If it's a long-term, successful relationship, you may be able to negotiate more flexible contracts.
Be very sure that you understand the nature of any clauses and that they are appropriate for your business. Don't forget also that if your business is part of a supply chain, you may have obligations in both directions. In other words, you may be locked-in to supply goods at a certain price at the same time as the price at which you buy them is fluctuating (a 'moving price'), or vice versa. Don't get caught out. If you're not happy with existing contracts, do your best to renegotiate once you have fulfilled existing obligations.
Hedging your bets There are other ways to mitigate currency risk, depending on your particular needs. These will generally be available via your FX provider and/or bank.
As with any financial strategy, it's important to weigh up risk versus return. So, for instance, you might be able to 'lock in' an exchange rate for a particular period of time (a practice known as hedging). This will allow you to plan ahead and calculate budgets according to a predetermined exchange rate, and protects you against downside risk. But if the currency moves in your favour, you could miss out on potential upside. In this case, it's the price you pay for certainty.
There are also tools specifically designed to offer protection against adverse movements, but which still allow you to benefit if exchange rates go your way. As you'd expect, these can be expensive, so again you need to work out whether the expense is justified in your particular circumstances. Do you need that degree of certainty or will the cost of the strategy outweigh the actual financial benefit? If you're financially savvy, you might also consider using hedging strategies such as options trading to manage currency risk. Again, this is a strategy that requires a sound understanding of the instrument and the potential risks associated with it.
Getting your head around these risks is worth doing, if only because it seems the Australian Dollar will move again.
According to the Organisation for Economic Co-operation and Development (OECD), 'commodity currencies' such as Australia's are actually overvalued at the moment.
How much it is overvalued depends on who you're talking to. The OECD has suggested that the Aussie dollar is 31 per cent overvalued, but Savanth Sebastian, CommSec economist, disagrees: "We expect the Aussie dollar to drop to around 92c by the end of 2011, after topping off around the 102–103c mark near the end of March. We're likely to see some recovery in the US economy, and more speculation moving to currencies that are more closely leveraged to the US recovery, like the Canadian dollar. But we expect the Australian dollar to stay over the 90c mark over the next couple of years after that. You've got to bear in mind that we've just recorded a record trade surplus with China, and we've yet to hear the trade surplus story with India, so the 30% overvaluation figure doesn't stack up to us." If Sebastian is right, the worst is not far off, but things won't get much better after that: we're looking at a fair