Majority of Australia’s SME importers unprepared for AUD volatility
29 October 2009
Many Australian importing businesses are exposed to significant risk if they do not adequately prepare for foreign exchange volatility and the possible future downside risk of the Australian dollar (AUD) according to XYLO Foreign Exchange Managing Director Mike D’Silva.
The AUD is on an upward trend and may reach parity with the US dollar (USD), however as we saw last year, when the currency crashed from a high of US.9850 in July to US.61.22 cents within three months, the AUD can be volatile. Prudent hedging strategies are required.
The fall in the AUD currency in such a short period increased the cost of imports by nearly 40 per cent for Australian businesses and when combined with the lack of demand as a result of the Global Financial Crisis, caused distress to numerous small to medium enterprises (SMEs) and Micro businesses. Many of these companies have now simply gone out of business.
“The common factor in their collapse was failing to recognise and manage the risk of currency fluctuations to their cash-flow,” Mr D’Silva said.
“While there are many benefits for Australian importers of the AUD moving towards parity, the consequences of not being prepared for any subsequent fall far outweigh these benefits.”
Mr D’Silva, who heads up Westpac’s foreign exchange subsidiary XYLO Foreign Exchange, said that the interest rate differential between Australia and other overseas economies is currently driving strong international demand for the AUD, which will only further strengthen if the Reserve Bank of Australia (RBA) increases the official cash rate again. However, economists including Westpac’s Bill Evans are forecasting the AUD to lose ground, by the middle of next year.
Mr D’Silva, says although one in three of Australia’s SMEs are aware of the negative impact to their cash flow and viability from a rapid fall in the AUD, only five per cent
are adequately prepared with currency risk management strategies.
“The SME segment has become increasingly sophisticated about currency markets but many still don’t fully appreciate the risks of not being adequately hedged. I strongly urge them to address this now before it threatens their very livelihood,” he said.
Mr D’Silva encouraged all small businesses to undertake a thorough review of their currency risk and to use products such as forward exchange contracts and options to hedge their future currency exposures.
Importing businesses at particular risk include fashion retailers, furniture retailers, leather goods companies and jewellery companies.
Foreign exchange services and hedging products are available through XYLO Foreign Exchange, which Westpac launched in 2007 as a specialist, low-cost FX entity for small and medium sized businesses.
More information on XYLO can be obtained at
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Sourced from east & partners survey – Australian Business FX Markets May 2009.
