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Three ways to protect your business against currency risk

Three ways to protect your business against currency risk

Piers Cracknell  ●   10 October 2016

Just because the dollar moves, it doesn’t mean your margins have to move too. Here’s how to take control and protect your business with currency hedging.

The last few years have been a roller-coaster ride for the Australian Dollar — and it isn’t over yet.

Since June 2014, the Australian dollar (AUD) has plummeted more than 20% against the US Dollar terms, from 95 US cents to around 75 US cents in May 2016. That is above the lows reached in January 2016 of below 70 US cents. We expect AUD to trade closer to 73 cents versus the USD by year-end. The risk of more RBA interest rate cuts will limit AUD upside but the bottoming in commodity prices will remain AUD supportive.1

Our dollar is one of the world’s most actively traded currencies, and consequently one of the developed world’s most volatile.

Unless you’re prepared, an unexpected currency movement has the potential to impact your margins, or even wipe them out altogether.

If you’re an importer or an exporter, there are some simple hedging tools you can use to protect your business against currency movements, or even turn them to your advantage.

1.     Forward Foreign Exchange transactions

This is one of the easiest and most frequently used alternatives for managing currency risk. You simply fix an exchange rate for a future transaction date. This can work well for importers who have payment terms from their overseas suppliers, such as 60 or 90 days.

This allows you to plan ahead with certainty, by locking in an exchange rate ahead of time. With credit approval, you don’t need to have cash on hand upfront, which can help with cashflow. 

Because the rate is fixed, you’re protected from unfavourable currency movements should the dollar fall further between the date you fix your rate and the maturity date. However if the dollar shifts in your favour, you won’t get the benefit of that change.

You can set up forward foreign exchange transactions online in moments, using CommBiz Markets.

The great part is that you also get the flexibility of being able to access that money when you need it.

2.     Foreign Currency Account

Foreign Currency Account is like an ordinary Australian business account, except it’s held in the foreign currency of your choice. That means you can exchange Australian dollars for your chosen currency when rates are in your favour, simply by transferring funds to your account. Then you’ll have funds at the ready for future transactions, with the certainty of knowing your exchange rate ahead of time, as you have already made the exchange. Once again the downside is that once you’ve moved the money to your foreign currency account, you are no longer in a position to benefit from currency fluctuations in your favour.

3.     Market orders

Tell us how much you’d like to exchange and at what rate — US 80 cents for example. Then we only make the exchange if the dollar reaches your preferred level. Your order stays on the market until the dollar meets your limit or you decide to cancel it.

The advantage is that your order is automatically carried out at the level you want. The risk is that the dollar continues to move in the wrong direction, so your order is never executed. Remember, too, that there is a AU$50,000 minimum order size, so this isn’t an option for smaller transactions.

To find a more request a call back from a CommBank FX Specialist.

[1] CommBank Global Markets Research, Forecasts – week beginning 30 March 2016. Things to know: This article is intended to provide general information only and does not take into account your individual objectives, financial situation or needs. You should seek independent, professional financial advice before making any decision based on this information. Past performance is not a reliable indicator of future performance. Commonwealth Bank of Australia ABN 48 123 123 124 AFSL.