Tips on how to plan for currency movements

We asked one of our Senior Currency Experts, Alex Hartley for some tips on how to plan for currency movements:

1. Consider the transfer needs of your business 

Let’s say you own an Australian business that needs to buy materials from the US worth US$100,000 each month and you want to limit the amount of risk you are taking in the current climate. Using the April 15 rate for Australian dollar to US dollar of US$0.6319, it would cost you AUD$158,252.89 per month at this rate.

2. Evaluate your profit scenarios.

Does the rate allow you to achieve a ‘Good’ profit margin?

If the current rates allow you to achieve a sufficient profit margin on your currency move, let’s say 10%, then locking in that rate for at least three months with a Forward Exchange Contract while the opportunity is there could be the best move for your business.

Does the rate allow you to achieve an ‘Acceptable’ profit margin?

If at the current rate you can only achieve a 5% margin but ideally you want 10%, then consider using a Forward Exchange Contract for between 40-60% of the amount you need to transfer each month. The level will depend on the risk you can take with the remaining amount due. The less flexibility you have to lose money, the more you need to protect. For the remainder, you can consider targeting a rate with a Limit Order which could help bring your profit margin back up.

Does the rate give you ‘No’ profit margin?

If you are just breaking even at the current market rates for the transfers you need to make, then you should again look at fixing that rate for the next three months with a Forward Exchange Contract. This may sound counter-intuitive as you may prefer to take the risk on increasing your profit. But that also involves taking the risk of exchange rates turning against you.

3. Reassess your position

For all of these scenarios, you should reassess your position after three months as we should have a clearer picture of where we are in terms of the pandemic and how much longer it will affect the global economy and your global money transfers.