How to protect your business from currency volatility and economic headwinds
With the US dollar sitting at the strongest it's ever been (and poised to get even stronger), markets are being rocked around the globe as they struggle to handle wild currency volatility.
In July this year, the value of the dollar against other major currencies reached its highest level since the early 2000s, and equaled the value of the Euro for the first time in two decades.
We sat down with Lee Kaznowski, Partner at Ascentis Accountants and Andrew Josephs, Director at ADJ Business Solutions, to discuss how currency volatility can affect your business, and what you can do to mitigate this ever-prevalent risk.
Why is the US dollar so strong right now?
Most asset classes have seen absolutely miserable returns in 2022, except for the United States dollar. The dollar has remained strong over the course of this year after the Federal Reserve hiked interest rates in an effort to perturb the sky-high inflation the country was experiencing.
To try and get a hold of inflation, the Federal Reserve actually raised interest rates at the fastest pace in a generation, causing a major problem for companies that do business globally.
The dollar’s immense strength can be seen even more when compared to the terrible performance of stocks, bonds, crypto and real estate in the country over the same time period.
Unfortunately for businesses, we’re currently experiencing a truly perfect storm of global economic chaos in all realism of the financial world, with warlike monetary policies, geopolitical uncertainty, inflation and the European energy crisis all major contributors.
And to add to the situation - these volatile currency environments aren’t going away anytime soon, as Latin America and the Asia Pacific are set to also make a sizable contribution to heightened market volatility throughout the remainder of 2022.
What are the risks to global businesses?
Global businesses that rely on imports from the US, China or anywhere in the world where suppliers prefer to be paid in a foreign currency experience a rise in import costs when the value of their native currency falls.
“The risk comes either when the company has international clients or is paying internationally,” says Andrew. “That’s when the volatile currency affects invoicing. I’ve got one client that invoices in euros because their clients are European-based. They've increased the euro amount of their annual membership because what they were getting from euro exchanges was less and less.”
Even if your business doesn’t import directly or sell internationally, there is likely to be a reliance on imports somewhere down your supply chain. This creates a knock-on effect with far reaching consequences as prices rise and profit margins are squeezed.
“When you’re dealing in multiple currencies it only takes a small change in the percentage of the exchange rate for it to have an impact,” says Lee. “I would say ordinarily, that can be both positive and negative for businesses. But at the current trajectory it just seems to be a cost, especially if you are looking to buy dollars.”
How can businesses mitigate the risk?
With the right strategies in place to organically reduce your net currency exposure and mitigate currency volatility, you can protect your business from currency headwinds or tailwinds. There are three ways internationally-trading businesses can protect themselves against the risks posed by market volatility:
Pass on the risk to your suppliers and customers by operating in your native currency only or increasing your prices.
Use forward contracts to hedge against currency fluctuations.
Operate through a US dollar account.
The drawback of the first two options is that unless you have leverage, global organisations and customers are unlikely to agree to take on the risk. Suppliers may refuse to invoice in your native currency and customers may insist on paying in dollars, or go elsewhere.
The third option however, allows businesses to avoid currency exchange altogether when the market is unfavourable.
“If you’re invoicing in dollars and having to pay in dollars, just maintain that cash in a US dollar account,” Lee advises. “You’re only exposed to the risk at the point of transfer to your native currency. So as long as you don’t have to exchange the funds to your native currency, you don’t lose or gain at that point in time.”
Here is where Airwallex can help businesses that operate across currencies. Say you’re an international eCommerce business. By opening a US dollar account with us, you can collect dollars from your US customers, hold those dollars in your account, and use them to pay international suppliers when needed using our Borderless Cards and Transfers. You can also wait for the exchange rate to become favourable, and exchange your dollars to AUD, HKD or SGD at a point when it benefits your business.
“I have clients that have saved money on FX because they are using Airwallex,” says Andrew. “My clients that work in multiple currencies, spend money in multiple currencies and need to travel have all seen a benefit in the ability to forward plan.”
How Airwallex can help your business hedge successfully navigate currency volatility
With Airwallex, you can open multiple foreign currency accounts from anywhere in the world - quickly, easily and for free.
By opening multiple foreign currency accounts, including US dollar, Euro, Chinese Yuan and more, you’re able to safeguard your business against the inevitable and damaging fluctuations of the forex market.
“Our main advice whenever you deal with international trade — and this was our advice before the currency problems we’ve been having — is to limit the amount of times you have to convert currency,” says Lee. “Because every time you convert currency it will always cost you, even if you get a good rate. So setting up international bank accounts, and Airwallex is a great platform for setting up a number of international bank accounts, you can control the cost. You can choose when you want to change your money back into sterling.”
Arnold Chan, General Manager, Hong Kong and Southeast Asia at Airwallex says: “In uncertain times, businesses operating across borders need the right financial infrastructure in place to shield against market volatility. Airwallex gives businesses the freedom to scale globally without exposing themselves to unnecessary risk. With our solutions in place, they can collect and spend in multiple currencies whilst limiting currency exchange, and the anxiety that comes with it.”
To set up an Airwallex account today, sign up free or speak to one of our advisors.
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