Do FX fluctuations eat your profit?

With growing talk of global trade wars and world markets just a Trump tweet away from uncertainty on any given day, it can be nervous times for businesses relying on foreign exchange rates.

But CCI Member AFEX, a global payment and risk management solution company, can help businesses manage the risk of fluctuating exchange rates by focusing on profit protection, cost control and transactional efficiencies.

State Manager Jamie Lockwood says with the end of year approaching it’s a good time to reassess finances for 2019 and consider options for foreign transactions – especially if there’s a time lag between when deals are struck and when payments must be made.

“If it is a big piece of equipment it might be six to nine months before they have to pay. But the exchange rate may fluctuate during that time, so that’s where the risk management piece comes in and what we can do is protect the dollar at a certain rate into the future,” he says.

Lockwood says with the Australian-US dollar exchange rate dropping from 80c in January to as low as 70 cents throughout the year, it can leave business finances vulnerable.

“It’s about a 12 per cent fluctuation there, so when people are managing a business you are looking at forecasts and what the risk appetite is but also asking what margins or budget level are you factoring in to protect your profit,” he says.

“As an example many importers were saying because we’re at 80c, 75c should be enough buffer this year, so now we’ve gone down to 70c and that’s where the risk management products come into play.

“They might have put protection in the back end at 75c to the end of this year, and that gives them time to adjust where the market is, so coming into the next couple of months when they are doing their budget levels for 2019 they will forecast or budget off what the current market rates are to give themselves a bit of a buffer.”

Head of Sales and Risk Management Conor Sheridan said forward contracts were one option for companies.

“Small businesses who have very low margins on their products will use forward contracts because it just allows them to lock away the margin in their products and they know exactly what they are paying,” he says.

“For other larger businesses they will use FX hedging options and they are very much an insurance premium as they give more flexibility in the market, so they are not tied in to delivering a specific rate but there is a number of different outcomes that could happen in that period of time.

“People like that flexibility against the unknown because we all know that businesses are not just dealing with their own suppliers, they are having to be concerned about what is going on at a global level, so trade wars or anything else that happens there, they just would like to be in the position where they have a bit of peace of mind.”

Sheridan says everyone has a view on the market, but they need to remember the fundamentals.

“What’s making it shift – so interest rates, inflation, trade wars, they are the things you have to constantly remind them of even though they might think the Australian dollar is the lucky currency.

“At some point it doesn’t matter and they are the conversations we are having right now going into 2019 – what are you looking to do with your currency exposure, how have you performed this year, what are you going to change?”

Sheridan says when dealing with currency, it’s not a matter of set and forget with AFEX constantly re-evaluating hedging strategies.

“We have to be able to react in the middle point because the foreign exchange market changes every day. We would never be in a position of calling what’s going to happen because we simply don’t know.

“When we are asleep Donald Trump is in full force in the US and a lot of situations happen in that market. The European market is the biggest foreign exchange from a liquidity point of view, we don’t look at that. We ask the clients, if it goes lower, what are you going to do?”.

AFEX, which has grown from three staff in 2009 to nine this year, deals with more than 1500 clients including 100 ASX listed companies. Visit the website here.

CCI membership gives you access to a range of business solutions including employee and industrial relations, human resources, workplace consulting and international trade services. Find out more here.

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