Foreign eXchange - What is your strategy?

 In today’s complex global economy, how do we forecast where the Australian Dollar (AUD) will lie against a basket of currencies we use in our business?

In economics, they teach you about the effects of differentials in inflation, interest rates, current account deficits, public debt, terms of trade and political stability. However, frequently the opposite happens for no apparent reason. Many other factors play a big role in the direction of currencies these days (e.g. Donald Trump only has to speak and the dollar moves).

 

                                                                                  “Donald Trump only has to speak and the dollar moves”

 

Our top economists have vastly different views on where the currency could be in the future with opinions varying as much as five percent. If these economists with vast resources at their disposal cannot agree then what hope do we have forecasting the AUD and timing our payments to preserve ever diminishing margins?

How do we manage this? We can utilise a mix of currency products such as forward exchange (FX) contracts and ratio options. With such products we are able to minimise much of the risk by fixing rates until a future date when debts fall due. In doing so, perhaps we will miss out on a rise in the AUD and forfeit some profit. On the other hand, if the dollar falls, then the anticipated margin on our goods or services is protected.

 

We can utilise a mix of currency products such as forward exchange (FX) contracts and ratio options.”

 

We all know there are hundreds of FX providers in the market vying for your business. Which one you choose to engage, is up to you; they all have similar fees and / or similar margins on their rates. But it’s always good to hear from other FX providers to check if you are getting a fair deal.

 

Good luck with your future FX deals; I hope it goes the way you forecast.

 

Let's get the conversation going. What is your strategy? 

 

 

Steve Hodgetts
Chief Financial Officer