As the Australian dollar continues its unpredictable dance against the US dollar, the euro, and other major currencies, local businesses engaged in global trade need to keep on top of their currency management almost daily.
From the vantage point of a Western Australian importer or exporter, a seemingly minor currency fluctuation can snowball into a big dent in profits.
“Currency swings are being influenced by country interest rate differentials, supply chain shocks, the weakness of China’s economy and ongoing geopolitical uncertainty – such as the United States-imposed tariffs, the Ukraine War and disruptions in the Middle East,” says CCIWA Senior Trade Consultant & Austrade TradeStart Advisor Darren Levy.
“All these factors filter into the AUD’s day-to-day fluctuations and create challenges with pricing, budgeting and hedging.”
Tools to manage currency volatility
Businesses can use several strategies to help smooth currency fluctuations, including:
- Forward exchange contracts (FECs): locking in an exchange rate for a future date.
- Options contracts: paying a premium for the right (but not the obligation) to exchange currency at a pre-agreed rate.
- Foreign currency accounts: holding funds in a currency that you frequently trade in, reducing the number of conversions required.
Lessons from past currency volatility
Back in 2023, when global shipping was recovering from pandemic disruptions, many WA companies saw big foreign exchange spikes as merely temporary.
Some gambled on the Aussie dollar bouncing back, but as interest rates marched higher – both domestically and overseas – exchange rate unpredictability became the new normal.
How to create a whole-business hedge strategy
Levy says that currency risk isn’t just a ‘finance team problem’.
“A good hedge strategy involves sales, operations, and even marketing,” he says.
“If your sales team can time invoicing with hedged rates, or your operations can adjust shipping schedules to match more favourable currency windows, you create a collective shield against volatility.”
CCIWA also recommends building strong relationships with your banking partner.
“Open communication about your upcoming foreign currency needs can lead to more customised hedging products,” Levy says.
Currency risk’s impact on cash flow
Currency risk doesn’t exist in a vacuum. It influences – and is influenced by – other factors like credit terms, working capital, and, ultimately, cash flow.
A single surprise in the exchange rate can cause cost overruns that then cascade into cashflow crunches or delayed payments to suppliers, creating more risk across the board.
“Ignoring currency swings is like ignoring cracks in your boat while you’re still on shore. Eventually, the water rushes in when you least expect it,” Levy says.
Related reading: trade finance risks
- How to manage credit risk in international trade
- How to manage working capital when trading internationally
- Protecting you cash flow from global trade risks
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How to manage currency risk in international trade
To protect your margins and maintain pricing confidence, consider the following:
- Use FECs to lock in FX rates for known purchases or sales.
- Consider options contracts if you want flexibility with protection.
- Hold foreign currency accounts to avoid unnecessary conversions and align with supplier/customer currencies.
- Collaborate across departments to plan transactions around favourable rate windows.
- Work with a trusted banking partner to tailor FX strategies to your trade routes and currency exposure.
If you are looking for support or advice in business, investment or trade, contact our experienced International Trade Services team at [email protected].
