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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While the strong Aussie dollar is good news for some, one of the groups feeling the pinch is expats living in Australia who have money overseas.

And according to Joe McKenna, of specialist foreign exchange broker World First, with the dollar expected to remain strong in the first half of 2011, such expats should be considering strategies to maximise the value of any funds they bring into the country.

“Most major currencies are struggling against the Aussie dollar at the moment, including the British pound, the Euro and the US dollar,” he said.

“This is good news for many, particularly those travelling overseas. However, we are also seeing more and more expats asking about the best ways to move their money into the country, concerned that the strength of the dollar is depleting funds they had earmarked to build their new lives here.

“For example, some clients may have sold a house in their home country but are now hesitant to move the proceeds here due to the eroded value of the sale proceeds. There are also those holding retirement savings offshore who are feeling that they are losing too much of the value of their nest egg if they bring that money over to Australia now.”

According to Mr. McKenna, predictions that the dollar will remain strong for the next six months or so means that these expats’ situations are unlikely to improve any time soon.

“While currency market movements are notoriously hard to predict, we expect that the dollar will stay high against other major currencies for the first half of 2011, then gradually depreciate as the pace of economic recovery in the UK, US and the Eurozone picks up.

“For example, we are predicting $1.65 to the British pound in three months’ time, which isn’t a significant change on current rates, then $1.75 to the pound in six months and $1.90 this time next year.”

Mr. McKenna has five tips for expats who need to bring money into Australia before the dollar begins to fall:

• Be realistic. Many expats benchmark their expectations against the much higher rates that prevailed a few years ago rather than current rates, but these highs are not likely to return for a number of years.
• Shop around. Exchange rates and fees can vary significantly between providers for the same transaction.  Banks in particular often take a large slice – up to three per cent – in commission, so it’s well worthwhile exploring the market for the best deal.
• Service counts. Find a provider that will closely monitor rates and contact you as soon as they rise to your chosen level.  Exchange rates fluctuate every second, so let someone else be your eyes and ears in the markets.
• Ask about flexible hedging. If you need to lock into a rate today – for example if you’re planning a large purchase such as property –  the most commonly used hedging tool is a forward contract. However, this locks you in to the current low exchange rate. Instead, ask your broker if he or she can offer a more flexible alternative, with some ability to benefit in upside if the market moves in your favour.
• Seek professional advice. We are seeing more and more clients who’ve been burned by either taking no advice at all or heeding poor advice, for example on online forums. Instead, speak to a specialist who can offer you sound, up-to-date advice that is tailored to your needs.

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