As the Australian dollar nears parity with a declining US dollar, the consequences for Western Australian importers and exporters are mixed.
As the Australian dollar nears parity with a declining US dollar, the consequences for Western Australian importers and exporters are mixed.
Trading at US87.6 cents at the start of the year, the AUD rose to US97.9 cents this month, or about 11 per cent, to reach levels not seen in 25 years.
Companies that have US dollar-based expenses can benefit from the higher Australian dollar, while exporters and those that generate revenue in USD face potential earnings risk.
ANZ senior currency strategist Tony Morriss said a rising AUD is good news for importers as it makes the AUD cost of imported goods priced in foreign currency cheaper as the AUD appreciates.
"This is why a rising AUD does not help to narrow a trade deficit as there is greater incentive to substitute domestically produced goods for imported ones," Mr Morriss said.
For exporters, a strong AUD makes it harder for them to compete in overseas markets with local producers.
"This is less of an issue for many resource companies as price rises for those commodities are much greater than the rise in the currency, but for non-resource companies this means pressure on margins, losing market share or else making it hard for those businesses to survive."
Businesses with deals lasting periods of weeks or months place themselves at high risk should the exchange rate go in the 'wrong' direction.
The risks associated with currency fluctuation can be overlooked by business with attention instead focused on revenue generation and sales.
Exporters that have disregarded the risk and not formulated a hedging strategy would have suffered a fall in their buying power of foreign currency receipts.
Managing foreign exchange risk has become an integral part of the daily activities of exporters, importers, borrowers and investors in uncertain economic times.
"Forecasting currencies is difficult at the best of times, but there is an added level of uncertainty to the global outlook at the moment due to the financial crisis and downturn in the US while inflation pressures are rising everywhere," Mr Morriss said.
Mr Morriss recommends the use of options to hedge exposures which provide insurance against worse case scenarios while leaving open the possibility of taking advantage of favourable moves in exchange rates.
Carly Rossbach, a senior associate at financial risk management firm Oakvale Capital, recommends businesses first establish an approved treasury policy and then base any hedging decisions on the requirements of that policy.
"A sound, board-approved treasury policy will deliver expected outcomes and take some of the emotion out of having to predict future currency moves," Ms Rossbach said.
While the AUD is strong against the faltering USD, it is also performing exceptionally well against other currencies - it is currently seven-year highs against the New Zealand dollar, 11-year highs against the British pound and near 15-year highs against the Japanese yen.
"This is not an easy time for exporters. We are more stable against the euro so that is one destination where exporters can compete," Mr Morriss said.
While many exporters might think they are too small to worry about the effect of varying foreign currency rates, Mr Morriss doesn't agree and recommends speaking to an advisor to determine the best hedging strategy for their business.
"In the event that an SME does have an exposure to a particular currency and that any major movement by that currency can have a significant detrimental impact on their bottom line, then we would consider currency hedging as adding value," Ms Rossbach said.
