RISK MANAGEMENT | 24 NOVEMBER 2022

Mitigating Black
Friday FX Risks

Author Paul Fenwick

Paul Fenwick

Head: Foreign Exchange
Business Bank Sales, Absa CIB

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The Black Friday and Cyber Monday sales are a year-end highlight for retailers and consumers alike. Here’s how to ensure volatile currency exchange rates don’t spoil the party

Late November’s Black Friday and Cyber Monday sales typically mark the start of retail’s silly season as consumers do their festive shopping – or simply hunt for bargains – in-store and online. But while many retailers count on Black Friday to carry them through the quarter (or, in some cases, the year), the events of 2022 have compromised consumers’ ability to spend.

“We all know about the cost-of-living crisis,” says Paul Fenwick, CFA: Digital Markets at Absa Group Limited. “In 2022, the biggest factor heading into Black Friday is people’s reduced spending power, given all the pressures they’re under.”

Exchange rate volatility compounds the problem. “We’ve seen the rand/dollar exchange rate depreciate by R3 to R4 to the US dollar this year,” says Fenwick. “So if you’re ordering a dollar-based item or service, for every $100 you’re spending there’s a R400 markup in terms of the exchange rate.”

But even if you’re buying goods or services in rands, those items have these increased costs priced in. “It’s not like importers can get around it,” he says. “They have to factor it into their pricing. The idea of Black Friday is that consumers will get significant discounts. Hopefully those can offset some of the pressures that they’re feeling from the exchange rate. However, retailers cannot be too generous with their discounts in these circumstances.”

Supply chain challenges

Continued global supply chain problems make the situation even more challenging – for both large retailers and smaller enterprises. “Bigger retailers are importing greater volumes in a single shipment, which immediately increases their risk of not being able to offload the product,” says Fenwick. “It also takes time for those shipments to land, so if you have a seasonally sensitive import you run the risk of it landing late at the port. Smaller importers are feeling the pinch, too. Their ability to negotiate pricing in this environment is more limited, so their profitability is also at risk.”

He describes this as “a nervous time” for retailers, despite the potential windfall of the Black Friday/Cyber Monday promotions. “Some of our clients are having to make riskier decisions just to continue doing business,” he says. “Nobody can escape the pain of where the rand is. You just have to adjust and run with those risks.”

Exports, imports and FX risk

Fortunately, Fenwick says, Absa clients have a range of tools and solutions to help them manage and mitigate their foreign exchange (forex, or FX) risks. “One of the things we’re doing is to help them monitor FX hedges and manage treasury flows , providing much better oversight of the challenges they face,” he says. “A lot of organisations still manage that by means of manual spreadsheets, whereas we have far more sophisticated tools and integrated engines available.”

The Absa CIB team is also conducting stress tests and scenario analyses with clients, gauging how they might be impacted by adjustments in the market or changes in FX rates.

Ultimately, though, Fenwick says that retailers – like all cross-border businesses – need to manage their FX hedging carefully during these volatile times. “The strength of your hedging policies will drive quicker decision-making,” he says. “Hedging gives you the benefit of knowing what your stock is going to cost when it lands. Leaving your FX unhedged creates uncertainty, as you won’t know where the exchange rate is going to go.”

As with any import business, retailers need to manage those risks and develop firm hedging policies that best suit their market. On Black Friday, as at any time of the year, those policies will enable quicker decision-making and quicker FX executions on any favourable market movements that might arise.

Author Paul Fenwick
Paul Fenwick

Head: Foreign Exchange Business Bank Sales, Absa CIB

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