Plummeting $A wreaks havoc on Australian business

The amazing slide of the Australian dollar continued overnight, with the local currency falling from US74.95c to US69.85c in overnight trade.

The amazing slide of the Australian dollar continued overnight, with the local currency falling from US74.95c to US69.85c in overnight trade.

The spectacular fall was largely driven by the continued woes on global financial markets. The Australian dollar is tied closely to commodity prices and as the global economy slows, currency traders are betting demand for commodities will fall over the next few years. The prospect of a 0.5% interest rate cut is also causing traders to sell the Aussie dollar.

The dollar has now fallen a whopping 30% since mid-July, when it reached a 25-year high of U98.49c, and it’s clear that SMEs are reeling from the sudden drop.

Dun & Bradstreet’s latest business expectation survey reveals that half of all executives indicate that recent movements in the Aussie dollar have had a negative impact on their business. The number of executives worried about the dollar has jumped by 37% since July.

Diversified consumer products company Hills Industries is one of those feeling the strain of the sudden fall, and managing director Graham Twartz admits he’s been very surprised about the dollar’s slump in the last 24 hours.

“The absolute level of the currency is not important – it’s the rapid movements of the currency and the volatility that makes it hard to react,” Twartz says.

“We import quite a lot of product, so in the medium term we will suffer some cost increases. But generally we play in markets where our competitors also import, so everybody will be affected in the same way.”

While Hills has taken a small amount (a few months worth) of hedging cover over parts of its import business, it’s almost impossible to plan for such rapid currency movements. Twartz says it is also that Hills keeps its focus on its main business. “As a company we don’t really take a view on the currency.”

The company’s best protection against currency fluctuations is its diversified portfolio of businesses and the fact that some of its products are still made in Australia. “That’s our greatest defence – that diversity.”

On the other hand, exporters are enjoying a bit of relief after a sustained period of Australian dollar strength.

South Australian company Enviromist Industries, which designs and manufactures equipment for the agriculture and turf markets, is an exporter to the US and has been buffeted by the strong dollar over the last 12 months.

Managing director Chris Vasey has been pleased to see the Australian dollar fall, but his joy is tinged with embarrassment – Enviromist set its 2008-09 prices two months ago when the dollar was at US95c and he may now have some explaining to do to distributors and customers.

“The stability is what really concerns me. It makes business unstable from the point of our distributors and our customers.”

Planning has also become very difficult. Vasey is in the process of setting the budgets for the year ahead and says it is not easy when US dollar sales could jump 10% to 15%, depending on where the Australian dollar settles.

“The problem we’ve always had with hedging is that we’ve never ever come out in front,” Vasey says. “We always get the currency movement wrong.”

It is almost impossible to predict where the Australian dollar will settle. As the global economy slows and the RBA considers more interest rate cuts, the local currency could fall further.

Twartz says business must get ready for the rollercoaster to keep rolling. “With the global panic on markets at the moment, there’s probably a bit more of this to come.”

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