Sunday, April 25, 2010

Currency Hedging

Prior to our launch we raised the issue of currency movements and hedging for our business.

We pay for our shoes in Hong Kong Dollars and Chinese RMB, both of which are pegged to the US dollar. So when the Australian dollar falls in value against the US dollar, our costs go up, and when the Australian dollar rises against the US dollar, as it has since we started putting our business plan together, our costs go down.

The Australian dollar is currently sitting at 0.9255 US cents which is great for us cost wise. But what happens if the Australian dollar moves, say to somewhere like US 0.48 cents which it got to about 10 years ago?

We're lucky in that we've developed a natural hedge. Over the last month nearly 30% of our sales have come from the US, 25% from Europe, 40% from Australia and a smattering from the rest of the world. We charge customers in their local currency. The 30% of sales in US dollars goes a long way towards covering our Hong Kong dollar and Chinese RMB costs, so if the Australian dollar drops in value against the US dollar it won't impact as much as it would otherwise.

In fact, over all we want a weaker Australian dollar. We're now a net exporter so if the Australian dollar is weaker against all other currencies, when we convert our foreign currency receipts into Australian dollars we'd get more for them, and our foreign currency receipts are higher than our foreign currency payments, which would also increase with a weaker Australian dollar. That said, the best result for us is for the Australian dollar to be strong against the US dollar (and therefore the Hong Kong dollar and Chinese RMB) and weak against all other currencies.

Given the way our sales are panning out, the biggest currency risk for us now is if the Chinese government revalue the RMB and Hong Kong dollar against the US dollar. The general consensus amongst economists is that the RMB is being undervalued by the Chinese government. The Chinese government is doing this to make Chinese products cheap for the rest of the world to encourage exports and growth in the Chinese economy. The US government has been pressuring the Chinese government to increase the value of the RMB because it's difficult for US firms to compete with Chinese prices, and arguably the US economy is suffering as a result. But so far the Chinese government has resisted this pressure, and for our sake, we hope they continue to do so.

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