Any keen observer of the Australian dollar’s wild ride in recent years would find themselves hard-pressed to predict where it will go next. After a dramatic fall in value – down more than one-third against the US dollar since the heady days of 2011 – the Aussie battler has staged a remarkable bounce back in recent months.
There is no doubt that the lower trading ranges in the last 12 months have been a boon for Australian exporters. Cheaper export prices have led to a jump in both the volume of exports and the number of exporters. The dollar’s overall downturn has also boosted tourism and helped the Australian economy manage the transition out of the mining boom.
More Volatility Ahead
However, the dollar’s recent upswing has shown exactly why ours is one of the world’s most volatile currencies. The Australian dollar is highly dependent on such factors as interest rates, trends in commodity prices and the strength of the US dollar.
So far in 2016, our dollar has defied many experts’ predictions. Looking ahead over the next 12 months, perhaps the only certainty is that the bumpy ride is set to continue.
Eyes on China
For Australian exporters, volatility against the US dollar is only one consideration. The signing of the China-Australia Free Trade Agreement means more Australian companies are pursuing opportunities in what has become a $150B two-way trade market.
Increasingly, Australian businesses are looking to invoice their Chinese customers in renminbi (RMB) to offer the same convenience as many of their global competitors.
However, exporters need to be aware that the Chinese currency is no longer a one-way ‘safe haven.’ After years of steady appreciation in the RMB, the People's Bank of China appears to be introducing more volatility as it shifts towards a market-driven valuation model.
Have a Plan
Australian businesses embarking on international trade need to have a strategy in place to manage currency fluctuations. A common mechanism is to use forward foreign exchange contracts to fix an exchange rate for a given date in the future, thereby protecting you from unforeseen currency movements.
You can also look to new markets to diversify the portfolio of currencies you sell into. This means your overseas earnings will be less exposed to a sudden swing in the value of a single currency such as the US dollar. Many new and emerging export markets also offer higher rates of growth than the US, the UK and New Zealand, markets which have traditionally been the focus of many Australian exporters.
Savvy businesses will avoid the temptation to make a quick profit on currency movements. Instead, focus on achieving predictable profit margins and avoiding unpleasant surprises for your investors.
Seek Expert Advice
CommBank can help you manage currency risks with a suite of solutions for exporters, including a dedicated China and RMB solutions team.
For more information on this and other global trade solutions, contact CommBank’s Trade Service Centre to speak to a Trade Specialist on 1300 654 112 or email firstname.lastname@example.org.