A foreign dilemma for exporters -- June 2008 report
- Mike D'Silva, General Manager, XYLO Foreign Exchange
- 2 June 2008
June08 export report: the dilemma of a strong Aussie dollar.
The Australian Dollar is currently trading at 24 year highs. With rates hovering around the mid-nineties this is great news for importers, but what about exporters who get paid in a foreign currency, especially US Dollars? For them, the news is not so good. A higher exchange rate means exporters are receiving less Aussie Dollars when the time comes to convert their foreign currency receipts.
Why is the Aussie Dollar so strong?
Broadly speaking, there are several reasons. Firstly, Australian interest rates are higher than those in countries like the USA, thus providing foreign investors with good opportunities Downunder. Commodity markets are generally strong which suits the Australian economy because we export a range of minerals globally. Finally, the US economic climate is quite weak which is resulting in low US interest rates and a struggling US Dollar.
What does this mean for Exporters?
All of this has resulted in a higher Aussie Dollar which some economists are predicting will continue to push higher over the next 12 months. Some are even predicting we could reach 1 for 1 against the US Dollar, or even higher.
So in real dollar terms, what does this mean for exporters? Consider an example where an exporter receives USD100,000. When the AUD/USD exchange rate was trading at 0.90, they would have been able to convert their USD and receive AUD111,111. However an exchange rate of around 0.96, as it has been hovering at during the end of May, they would only be receiving AUD104,167. This is a significant difference and can put a real dent in an exporter’s bottom line, especially over time and if the Aussie Dollar keeps gaining in strength.
So what can Exporters do?
Firstly, make sure you are getting the best possible exchange rate from your FX provider. Don’t be afraid to question the rate you receive and even shop around – there are plenty of FX providers who will compete for your business. The rate in the market might not suit you, but there is no need to further dent your bottom line by accepting a less than competitive quote.
Secondly, assess your FX risk. If you feel that the currency will continue to appreciate, or you would just like some certainty around the rate you will be converting future receipts at, then you might consider managing some of your risk. Simply locking in an exchange rate for a future date could protect you from an adverse currency move.
At the end of the day, while foreign exchange may not be your business, it can be a significant by-product of your business. Taking the time to achieve better exchange rates can only benefit your bottom line.
Mike D’Silva is a General Manager at XYLO Foreign Exchange
