Foreign-exchange providers are giving the big banks a run for their money in the quest to help smaller businesses manage their offshore currency risks.
CFO 1 April 2006
The volatility of the Australian dollar is a constant threat to the profits of small and medium enterprises who fail to hedge their foreign-exchange risk. The dollar, which has fluctuated wildly since 2001, “was at 48¢ against the US dollar 30 months ago”, says Mark Whelan, ANZ joint managing director of markets sales. “It’s peaked at 80¢ and is now back down at 73.”
Yet only 5 to 6 per cent of small to medium enterprises actively use any sort of hedging product for foreign-exchange risk, compared with 70 to 80 per cent of larger companies, says Martin Crawford, managing director of leading non-bank foreign exchange dealer Travelex.
Yet only 5 to 6 per cent of small to medium enterprises actively use any sort of hedging product for foreign-exchange risk, compared with 70 to 80 per cent of larger companies, says Martin Crawford, managing director of leading non-bank foreign exchange dealer Travelex.
“It’s very hard running a small business and the last thing you want is foreign exchange to tinker around with your margins,” Crawford says. “You price something, you think you’ve covered your costs, then all of a sudden the currency moves 5 per cent against you and you’ve lost 5 per cent of your margins.”
Companies also need to be aware of the changing foreign exchange markets of their trading partners. China has become Australia’s second-biggest export market and has just overtaken the US as the third-biggest trading partner. While most businesses use the US dollar to trade with China, the yuan is on the road to full deregulation.
Last July, pegging of the yuan was changed from the US dollar to a weighted index of currencies (see “Renminbi pegged” below). In November, the central bank, the People’s Bank of China, executed its first domestic currency swap. In January, over-the-counter trading was introduced.
ANZ reckons these changes herald the greater volatility of China’s currency. Yet many SMEs – companies turning overfrom $5 million to $20 million – are ignorant of the implications of the changes.
Part of the problem is that smaller companies do not know where to go for sophisticated hedging and foreign-exchange services. The major banks are focused on the foreign-exchange needs of larger companies. Smaller companies, even in the internet age, have literally been forced to transact at branch level.
Matt Gilmour, joint managing director of non-bank Ozforex, says: “In the 1990s when there wasn’t so much activity in the non-bank sector, the banks were pretty choosy who they’d do forward contracts with and options with. One of the things about the non-banks coming into the market is that we offer a much greater breadth of product to smaller customers, from forward contracts to options.”
Paul Dowling, principal analyst at specialist banking research firm East & Partners, says there is a long-term trend for SMEs to use more foreign-exchange products. Historically, they have used spot FX and the banks are aggressively pushing FX contracts and swaps.
However, he also says that many SMEs simply don’t know about these products. “The banks are the incumbent 800-pound gorillas,” he says. They hold an the advantage over