Why foreign exchange rates could be your greatest business challenge in 2021
The past year has seen currencies and foreign exchange (FX) rates in a real state of flux as COVID-19 rocked the global economy.
The Australian dollar was a perfect example of this, plunging to just 55 US cents back in March 2020 when the pandemic was declared before rebounding to highs of 70 US cents in June. Today the AUD is trading at around 77 US cents - a slight decline from its multi-year peak of 79 US cents two months ago.
According to international money transfer (IMT) provider TorFX’s managing director, Nigel Fox, exchange rates will likely remain volatile for the rest of 2021.
“While the world looks to be in far better shape now than it was 12 months ago thanks to the rollout of vaccination programs … there can be no doubt that some of last year’s uncertainty has bled through to 2021,” he said.
“This is even before we consider the ongoing uncertainty surrounding Brexit in the UK, a new administration in the US, and the risks posed by an increasingly aggressive approach to foreign policy by China.”
Fox said that for Australian businesses with international interests, whether it’s staff or suppliers overseas, this volatility could have a real impact on profit margin.
“Businesses will need to tread carefully and take steps to ensure they aren’t caught out by sudden shifts in the currency market,” he said.
Which industries are most affected by FX volatility?
Unsurprisingly it’s businesses operating internationally that would be most vulnerable to exchange rate movements - think importers or exporters.
These businesses need to handle payments in multiple currencies on a daily basis, so any change in exchange rates ultimately impacts how much money they would get out of conversions from one currency to another.
“For instance, exchange rate fluctuations can have a major impact on supply agreements as a fall in the value of a business’s local currency can potentially leave them out of pocket when it comes to settling an invoice,” says Fox.
“This can have a knock-on on pricing, with businesses potentially needing to pass the increased costs to their customers. This, in turn, could cost them market share if their competitors have been able to avoid similar price adjustments.”
Fox says the energy sector is also disproportionately affected by FX volatility, as oil and other fuel sources are tied to the US dollar.
For a similar reason, any businesses that deal with commodities such as manufacturers should also pay close attention to exchange rates. That’s because fluctuations in the US dollar value can impact commodity prices too.
That said, even businesses without a global footprint should keep an eye on currency movements, says Fox.
“Given the rise of globalisation, it’s safe to say currency volatility will leave a mark on just about every sector. Even if a business operates entirely within the borders of a single country, it can also feel the impact of a fluctuating currency,” he says.
“For instance, if the value of a currency falls too much, then it may be more cost effective for businesses to source products domestically, driving up local demand and potentially resulting in increased costs for everyone.”
International money transfer tips for your business
If you’re worried about the impact that exchange rates could have on your operations, there are steps you can take to help minimise FX exposure to your business. These include:
1. Stay on top of the latest currency news
Many specialist money transfer providers offer daily updates on how major currencies like the USD, GBP and AUD are faring in relation to each other. These are usually free to access on their websites, and can help you understand market trends. That way, you'll be able to make more informed decisions on the best times to make a business money transfer.
2. If exchange rates are good, consider a forward contract
Forward contracts are an IMT tool that allows businesses to fix a current exchange rate for a future transfer. Depending on the provider, you could potentially lock in a rate for up to two years.
“Fixing a rate in this way can help firms budget and forecast for future expenditure more accurately and pre-empt costs,” says Fox.
“If the currency market moves against you, a fixed rate can also ensure that your company doesn’t need to pay more than expected to settle an invoice.”
The potential downside though is you may miss out on even better rates down the track, so you’ll need to weigh this up.
3. If exchange rates are poor, consider a limit order instead
If current exchange rates aren’t as good as you are hoping, then a limit order may be a better feature for your business. This option allows companies to set their ideal rate, with the money transfer automatically taking place once that target rate is hit.
Just remember that once the transfer is triggered, it’s legally binding so you can’t back out.
If you’re concerned that your ideal rate won’t be reached, then you could also use a stop loss order which allows businesses to set the worst-case rate for their transfer.
4. If you’re not ready to commit, set rate alerts
While the services above require you to eventually make a money transfer, exchange rate alerts don’t come with the same obligation. In fact, you can set rate alerts without even signing up for an IMT account (although certain functionalities may be restricted).
These alerts work like limit orders, in that you can enter a target exchange rate and you’ll receive a notification via SMS or email as soon as that rate has been hit. Some IMT specialists may even let you set alerts for multiple currency pairs.
The main disadvantage of this feature is that because exchange rates are always fluctuating, your rate may be slightly different by the time you confirm your actual transfer.
5. Shop around!
Different providers will charge varying markups and fees on top of the mid-market or ‘real’ exchange rate. So, as with other financial products, it always pays to shop around and find the best money transfer deal with your business.
Let’s do the maths. As of 30 April 2021, the gap between the highest and lowest AUD/USD exchange rates in the Mozo database is 0.0402. For a $10,000 transfer, that translates to a difference of $402!
Ready to compare today’s exchange rates? Scroll down below for a snapshot of AUD/USD offers today or head on over to our business money transfers comparison hub to weigh up deals for even more currency pairs.
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