Hedge now, gain later

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Businesses urged to consider hedging strategies ahead of expected dip in value of Aussie

Businesses that rely on importing goods or services are being urged to consider hedging strategies in the first quarter of 2011 to make the most of the current high Aussie dollar – and mitigate against any adverse impact of expected decreases in the value of the Aussie later in the year.

“We see the Aussie continuing to perform strongly for the early part of the 2011, but there is a feeling that it is heavily overvalued and may start to run out of steam from the second half of the year onwards,” said Joe McKenna, head of corporate foreign exchange at specialist brokers World First.

“For example, we are predicting $0.98 to the US Dollar in three months’ time, which isn’t a significant change on current rates, then $0.95 to the US Dollar in six months and $0.90 this time next year.

“What we would say to businesses is don’t get complacent and consider protecting yourself against future currency movements. Hedging is definitely something for businesses to consider in the early part of 2011, and we are seeing a lot of companies hedge on a three to six month basis to protect a certain margin,” he explained.

Mr. McKenna believes there are a lot of factors that could have a negative impact on the value of the Australian dollar in 2011 – most obviously, the flood disaster.

“A number of industries, from commodities to agriculture to financial services, have been heavily affected by the flood crisis and this has already had some impact on the dollar.

“In the medium-to-long term, however, continuing economic recovery in other parts of the world and a possible slowdown in the Chinese economy may start to show more significant effects on the value of the dollar from the middle of 2011.

“If the Chinese economy is performing well, demand for commodities remains robust, which has positive implications for the Australian economy. However, we know that China is looking to increase interest rates and reduce lending to prevent their economy from overheating, and we expect this will have a negative impact on our economy during 2011,” he explained.

“There are also signs that economies like the US and UK are beginning to play catch-up and starting to show green shoots of recovery, and this will make the major currencies like the US dollar stronger in the long run against the Aussie.”

Mr. McKenna recommended that SMEs who don’t need to pay for items up-front consider taking out forward contracts, meaning they can lock in a contract to secure today’s rate for a future date anywhere up to two years ahead.

But he also advised business owners to shop around for the best rates on their foreign exchange as offerings can vary massively between providers.

“Corporate day rates with some of the banks range up to 1.5% away from the market rates. If, for example, your business imported $2 million worth of goods in a year, that’s $30,000 Australian dollars paid unnecessarily every year.”

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