The COVID currency survival
guide for entrepreneurs and SMEs

Keep your business in balance with these foreign exchange (FX) strategies for COVID-19 and beyond.

Right now, the only thing that’s certain is uncertainty. As any entrepreneur will tell you, the COVID-19 pandemic – with its lockdowns and downturns – has brought confusion and volatility to almost every aspect of doing business.

Exchange rates are no exception: between March and July 2020 the rand-dollar exchange rate shifted between R16.50 and R19, with significant weekly (and even daily) fluctuations that left many businesses flummoxed. Compounding the problem is the fact that few smaller business owners understand the intricacies of the FX world, and fewer still appreciate the options available to them, even without a global pandemic to navigate.

Surviving this kind of volatility takes information, preparation and knowing where to go for help. Here is a roundup of FX strategies for entrepreneurs and SMEs.

When it comes to payments, there is always the choice of paying on demand (known as “spot”) or, in the case of a future obligation, fixing the rate now. “Each choice comes with risks, and there’s no ‘perfect’ model,” says Paul Fenwick, CFA: Digital Markets at Absa Group Limited. He warns that foreign exchange rates fluctuate all the time (not just during health crises), with the rand being a notoriously volatile currency.

“It is therefore important for clients to understand these risks,” says Fenwick. “If I know I have an order coming in six months’ time, I can wait until those goods arrive and then book my FX rates on that day. If I do that, I’m exposing myself to whatever the spot rate is going to do for the next six months – and all the political and economic noise that comes into the system. Alternatively, I could decide that I like where the rate is today, and I’m willing to bear the risk of locking into that rate. This way I know today what I’ll pay in six months’ time for those goods, and I can budget and prepare for that.”

Take action:

Don’t go it alone. Contact Absa’s FX sales team for guidance on the approach that’s best for you.

“My recommendation to clients is always the same,” says Fenwick. An advocate of the balanced approach, he recommends that you don’t put all your eggs in one basket. “If you can only trade spots or forwards, maybe put 50% of your exposure in the forward markets and the other 50% on the spot. Then, if the market moves in your favour, you can partake in that, but if the market moves against you, then you’ve got some flexibility, with some of your costs already locked in.”

Of course, this all depends on the type of competitor environment your business is operating and even where along the value chain you operate. “If I have a business with little competition and many clients, there’s no pressure regarding the rate I’m going to book, then I could just book at the forward rate as orders come in removing all currency risk and best prepare myself and my clients for the cost of goods I am going to pass on through the value chain.”

Take action:

Talk to us about how we can assist you with de-risking strategies.