Navigating Currency Risk > Strategies for CFOs in a Volatile FX Market

Global economies are weathering storms on multiple fronts and the ripple effect for CFOs everywhere is challenging to say the least. The latest episode of CFO Magazine Lunchtime Live gave CFOs and finance leaders some excellent insights into managing the impacts of FX market volatility.

In this exclusive webinar, I had the opportunity to hear from leading retail CFO, Mitchell Koureas, CFO, Barbeques Galore, Steven Dooley, Head of Market Insights, Convera and Stephen Koukoulas, leading economist and media commentator, shed some light on how finance leaders can position themselves to handle these turbulent times across foreign exchange markets. Here are my top takeaways:

What FX market turbulence means for CFOs

The US economy has defied predictions of a downturn this year and this has been a major driver in foreign exchange markets. Predictions of a recession never eventuated despite interest rate hikes from the US Federal Reserve.

The Australian dollar started 2023 at 71 US cents in January, but fell throughout the year to its lowest in September at 63 US cents.

Coupled with the lag in the global manufacturing industry caused by the sheer amount of purchases made by consumers during COVID lockdowns, commodity prices have been hit hard.

While it pays to be aware of what economic experts may predict, Dooley said CFOs shouldn’t take market predictions as gospel.

“I worry sometimes that a lot of CFOs put too much stock into forecasts,” he said. “Unexpected events occur at any time. One of the traps is that CFOs and corporate finance professionals will see a rate and then base their businesses’ forecast over the next 12 months on those expectations.

“Sometimes they’re right, sometimes they’re wrong. But what we always do see is a large amount of volatility.

“I think what CFOs probably should do is not put too much stock in the market forecast of a bank, economist, people like myself, but instead to look at the historical precedent of how the Australian dollar and FX markets in general tend to behave and try to base what might happen, what the future might look like on what’s happened previously.”

Market volatility doesn’t always spell disaster

As well as other economies and geopolitical issues, including the unrest in the Middle East and continuing conflict in Ukraine, the AUD is impacted by domestic interest rate movements and inflation figures.

“We’ve got this situation unfolding where the Aussie dollar is going to settle,” said Koukoulas.

“In theory it should be higher, but in reality it’s being pushed and pulled by these interest rate moves and China expectations. There are some pockets of the economy who are doing exceptionally well in this period – people who are 60 years old for example. It’s the people with mortgages who are struggling.”

The rising costs of living in Australia is something business leaders need to be aware of. While these tough market conditions might throw up some challenges for CFOs, it can also present some rare opportunities, said Koureas.

“We’ve seen parts and segments of our business being extremely resilient and other parts facing challenges,” he said.

“It’s important to recognise the volatility of the environment can offer some great opportunities. I think about it in terms of productivity. I view that through a number of lenses: productivity of capital deployed, CapEx, investment, research, productivity of space utilisation, productivity of partner relationships and are the economic settings really set up for the forward journey of your organisation rather than where you were and how productive are those relationships and are they where you want them to be.

“Focus on value adding tasks rather than transactional.”

How to be prepared for FX movements

Planning for the most optimistic as well as the most pessimistic outcomes is a good way to be ready for whatever the foreign exchange market may throw at your organisation.

“In managing a business you should be trying to reduce the risk, not increase the risk and sometimes trying to predict where the Australian dollar might go just is another risk that you’re adding to your business,” said Dooley.

“Look at the volatility and ways to plan for that eventuality. What can we do in our business to reduce the risk if the market goes down against us? What can we do if the market potentially raises in our favour?”

Koureas said paying attention to global market movements and planning ahead creates more certainty for financial controllers.

“Having your finger on the pulse around the economic data both locally and abroad, and its impact on the local economy, is key to anticipate what might happen across rates,” he said.

“At Barbecues Galore we leverage a number of inputs to assist in that decision making. We’re always thinking about what the impact of currency movements are on business, that way we can set forward the company budget settings in place so that we can take the things that happen to our business that we’re not in control of and risk around that out and start thinking about what we do have control of, and that is our value proposition in the market to customers, the price settings that we go to market with.

“It creates certainty both in the short term and allows us to focus on things we do control rather than the things we can’t so all our energy is focused on how can we deliver the best outcomes for the organisation rather than what Jerome Powell’s going to say which might move the currency markets.”

Businesses also have the option of hedging their debts, which has its pros and cons.

“Hedging is one way of doing it if you want to rest easy at night,” said Koukoulas.

“It’s a bit like taking out a fixed interest rate on your debt. You’ve taken that risk out of your business and all you’re doing is concentrating on your business.

“Yes, hedging can be expensive and given the currency markets are so hard to expect, frankly impossible to predict, so if you want to take out that element of your business that can make or break you, to be blunt.”

For more of the latest CFO news, tune into the next CFO Webcast A CFO’s Guide to Hedging Instruments, November 23 at 12pm AEDT.