Foreign exchange: Five things you need to know

Australians make billions of dollars worth of international transactions each year. We’re increasingly spending money with global companies, transferring funds to overseas accounts, or as business owners, expanding our global footprint to foreign markets.

Despite the positive prospects and excitement that the global economy can offer, anyone with international interests is vulnerable to foreign exchange (FX) volatility. While a well-planned FX strategy can help mitigate risk and keep cash flow running smoothly, the absence of one can create a major pain point for profit margins.

If you’re unsure whether you or your clients need an FX plan, here are five factors to consider.

1. FX risk affects more people than you think.

Anyone who does business with international customers or suppliers has probably felt the effects of a sudden shift in the market, whereby an unfavourable FX rate has led to higher-than-expected costs. 

FX risk is also felt by businesses that receive payments – or receive other forms of income, such as interest, dividends or royalties – in foreign currencies. Likewise, anyone who transfers money to foreign accounts or has offshore investments and assets can be caught out by a fluctuating currency. 

2. A slight difference in the exchange rate can have a big impact.

Exchange rates are important, yet they don’t often get enough attention. 

In a quick, one-off transaction, a difference of a point or two doesn’t sound like much, but it adds up considerably over a year. 

Particularly now, with geopolitical events triggering a tidal wave of FX movement, not to mention supply chain delays and logistical challenges, businesses that are unprepared for currency fluctuations are having to raise their prices (to the detriment of their market share) or absorb excess costs themselves. 

3. Having an FX plan can put currency out of the equation. 

Depending on your business’s or your clients’ needs, a range of hedging strategies can provide protection from currency loss should the market move against you. 

Forward contracts, for example, allow you to transfer funds up to 12 months in the future at an agreed-upon rate, so you can forecast and budget accordingly. 

Meanwhile, target rate transfers give you the option to target a future improved rate. (You can also hedge a portion of your currency exposure, so that you can still take advantage of future exchange rates in the spot market.)  

Try OFX’s interactive Currency Exposure Calculator to see what shifting exchange rates could look like for a typical invoice your currency transactions. 

4. FX specialists offer a cheaper alternative to the big banks.

A 2019 inquiry by the Australian Competition and Consumer Commission (ACCC) found that shopping around for FX services can save Australians hundreds of millions of dollars each year. 

At the time, consumers and small businesses that used the most expensive bank to transfer US$7,000 (A$9595 at present) would have paid an additional A$500 (or more) compared to those who used the cheapest supplier.

5. An FX specialist can help mitigate risk.

Working with an FX specialist not only helps you to minimise risk, but also can help you capitalise on positive market movements. This gives businesses greater certainty on costs and profits, as well as peace of mind that even the most extreme FX volatility won’t hurt their bottom line.

As well as typically offering lower fees and rates than banks, OFX’s team of currency specialists merge global knowledge with local expertise to help you make informed decisions about your money. Whether you want to make a currency transfer or build a risk management plan, we’re here to help.