A fall in the value of the Australian dollar (AUD) against the U. S. dollar (USD) benefit Billabong in two folds, strengthened price competitiveness and translation advantage. Firstly, the Americas segment accounts for about 50% of Billabong’s sales revenue in 2008 and 2009. (Appx. 1) In case of depreciation of AUD against USD, the price of imported surfwear to the U. S. in terms of USD will decrease. The US importers demand more for Billabong’s products. The sales increases from the strengthened price competitiveness.
Secondly, when Billabong received payment from the importers, it will translated back into AUD for use in Australia. As AUD depreciate, the receipt in USD can be translated into more AUD than before, bringing increase in sales revenues. The effect of 35. 6% fall in value of AUD in the second half 2008 was reflected in the interim report ended December 2009, with sales revenues in the Americas increased by 33. 9% (to 385 million). (Appx. 2) b) One can predict the future exchange rate by using forward exchange rate. In times of financial crisis, the forward exchange rate is not a good predictor because the market is inefficient.
In an inefficient market, Fundamental approach can be used for forecasting, based on economic theories and analysis of variables. But it is not effective in predicting the short-term fluctuations in exchange rates, nor is it comprehensive as there would always be variables that would not be expected. Another approach could be using technical analysis to determine the trend of a currency by analyzing historical data. This approach is suspected to be a crystal ball because there is no theoretical rationale. The financial crisis have caused unanticipated fluctuations in the value of Australian dollar.
Press forecast for the exchange rates forecasts of 2009 in the late 2008 were towards continual depreciation. It was 67. 83 US cents on Christmas Eve 2008. The Australian Associated Press (AAP) predicted it would be 61 US cents in the mid-2009, and the French bank BNP Paribus also said the lowest point of AUD would be 47 US cents in June 2009. (Appx. 3) The prediction was based on the slowing growth of Asian market and loss of investors and consumers’ confidence. It is a surprise to everyone when the AUD appreciated. The drivers of the appreciation i. e. debt crisis in the U. S. and fast recovery of demand from Asia, are unexpected.
Impacts of the financial crisis are sophisticated and their effects on the foreign exchange market cannot be forecasted by any approach. In order to better protect itself against the unanticipated appreciation, Billabong is suggested to hedge the foreign exchange risk by forward exchange rate contract. Billabong loss from translation of USD to AUD in case of AUD appreciation. By forming forward exchange contract with forward exchange dealer, the receipt of USD in the future can be translated at an agreed rate, i. e. the forward exchange rate. Suppose a debt of USD 1 million was to be received on 1 May 2009.
Suppose 180-day forward exchange rate on 1 Feb 2009 is USD/AUD= 1:1. 44 (AUD 1. 44 million). If the company made a forward contract at that time, the loss from translation would have be reduced by AUD 70,000. This would be a great deal for Billabong since the majority of its sales revenues are in USD, especially for the transaction with long credit period. c) Although there was an appreciation of AUD, the sales revenues in the Americas segment in 2010/11 increased. The increase mainly came from the acquisition of West 49 in Canada and RVCA brand in the United States.
But the increase in value of AUD still brought a translation disadvantage in the reported results. With 1 cent increase in the average monthly rate for the AUD against the USD, the net profit after tax (NPAT) would decrease by 0. 3%. Together with appreciation against EURO, sales revenues and NPAT were reduced by AUD123 million and AUD18 million respectively because of the exchange rate effect. (Appx. 4) To limit Billabong’s long-term economic exposure to the changes in exchange rate, diversification of production and diversification of market could be applied. Billabong may diversify its production by foreign direct investments in the U.S. e. g. set up local production plants. In case of appreciation in AUD against USD, the price competitiveness of products would not be weakened as compared with local products.
Flexible sourcing could be applied to allow switch of production from one country to another. Learning from Stanley Black & Decker, Billabong could reduce its import to the U. S. and export more from the U. S. production plant to other countries when USD depreciate against other currencies. This help to create long-term economic competitiveness in the U. S. market. For diversification of market, a more balanced market distribution is recommended.
The current position of Billabong is highly dependent on the Americas segment with almost half of the revenues. If the situation continues, trading in other segments cannot help if the Americas segment fails. Revenues when diversify in different currencies could be better secured from the economic exposure of exchange rate risk. Smith, P. (2011, Aug 23).
The domestic currency also risks falling to a new all time low, particularly if the pace of growth in regional Asia countries and China slows more rapidly than expected, delaying a recovery in Australia. The Australian dollar was trading around 67. 83 US cents on Christmas eve 2008, down 23 per cent from the local close on December 31, 2007, of 88. 18 US cents. It was also down 31 per cent from its 25-year high peak of 98. 49 US cents touched in July, 2008, setting the scene for the currency’s weakest start to a new calendar year since 2003.
The Australian dollar is forecast to be around 61 US cents by mid-2009 before rising to 69 US cents by year end, according to the median of eight currency strategists’ forecasts gathered by AAP. But some also see the unit dipping to an all time low of 47 US cents in the first half of 2009 and peaking at 75 US cents in the second half. The wide trading range forcast for the new year suggests there will be on-going volatility in the foreign exchange market, as an economic slowdown in Asia, a possible recession or at least very slow growth in Australia, low commodity exports and any further bad global economic news weigh on the minds of traders.
In 2008, the Australian dollar experienced its most turbulent trading year since the introduction of decimal currency four decades previously as the global financial crisis began to debt the local economy and consumer confidence. A year ago, currency strategists polled by AAP expected the Australian dollar to end 2008 at 89 US cents. But the currency now looks set to finish 2008 well below 70 US cents. By the middle of 2009, even the most optimistic currency stragists expect to see the Australian dollar trading below its 25-year, post-float average of 72 US cents.
Come Christmas 2009, the Australian dollar is expected to have recovered, albeit modestly, to 69 US cents as a possible growth rebound in China restores demand for key Australia’s commodity exports. Strategists were divided on whether government stimulus packages being instituted around the world will restore financial market confidence, and therefore demand for risk-appetite currencies like the Australian dollar. The most bearish strategists, at French bank BNP Paribas, expect the Australian dollar to hit an all-time low of 47 US cents by June 2009, its weaker point since.
Parabas senior currency strategist Sharada Selvanathan said slowing Asian economies will hamper demand for the Australian currency and threaten the nation’s terms of trade, the ratio of export to import prices. “I don’t think we’ve seen the bottom in the Australian dollar,” she said from Hong Kong. “Asia is slowing and we’re going to see weak numbers come out of Asia – that’s crucial to Australia’s external sector, the terms of trade and the Australian dollar. “Australia’s resources states are going to get hit.
“As we see weakness come through, in terms of investment and consumption, that’s going to have a bigger impact on the economy. “I still think we haven’t come to the middle of the slowing cycle in Asia – we have more to go. ” Westpac chief currency strategist Robert Rennie is more optimistic. He believes a rebound in China will drive a recovery in commodity prices and help the Australian dollar finish 2009 at 69 US cents. “As China looks after China, you’ll see the Australian economy and commodity prices benefit to a certain extent,” he said.
“That will see the Australian dollar move higher. ” Chief market analyst with online currency trader Easy Forex, Mike Malpede, expects the Australian dollar to fall to 58 US cents by June, as falling export sales lead to a widening in the current account deficit. “Lower export sales will contribute to further widening of Australia’s current account deficit through first half of 2009,” he said. “Australia’s current account deficit may top six per cent of gross domestic product by mid-2009.
” China, one of Australia’s biggest trading partner and a major buyer of its commodities, is expected to grow at a slower pace in 2009 while other key export markets, such as Japan and the US, cope with recessions in their economies. JPMorgan economist Helen Kevans said the Australian economy also risks falling into recession, which could push the Australian dollar down to 57 US cents by the end of the first quarter of 2009. But Ms Kevans said the currency would climb back to 66 US cents by the end of 2009 as the federal government’s $10.4 billion fiscal stimulus package helps to kickstart an economic recovery.
“When that confidence does resume, we see a pick up in the second half of next year and that appetite for the Australian dollar and high risk will start to pick up,” she said. ANZ senior currency strategist Tony Morriss disagrees, saying the fiscal stimulus package will take longer to work, which means the Australian dollar could to dip to 58 US cents and fall further to 54 US cents by the end of 2009. “The risks are we’ll see a protracted downturn,” he said.
“The US dollar will remain strong next year, global growth will remain weak and the Aussie will remain under pressure. “For the Aussie, the recovery is more in 2010 than 2009. ” Commonwealth Bank currency strategist Joseph Capurso expects the Australian dollar to climb up to 75 US cents by year end, as global interest rate cuts give traders more confidence about a return to worldwide economic growth. “There are lots of dire headlines but central banks and governments have done an awful lot – that will get people to change their views on the world economy,” he said.
His view is supported by investment house State Street Global Markets, which as recently as October predicted the Australian dollar could in a worse case scenario sink to 40 US cents in 2009. Macro-economic strategist with the asset management group, Dwyfor Evans, said the Australian dollar was more likely to finish the 2009 first half at 62 US cents. The Hong Kong-based strategist then expects the Australian dollar to climb to 70 US cents by the end of 2009 as rate cuts around the world go to work.
“Most central banks have cut aggressively and this should filter through in the second half of the year assuming credit markets become more normal,” he said. Citigroup managing director of economics Stephen Halmarick said an easing of the global financial crisis should help the Australian dollar climb back to 68 US cents by Christmas 2009. “The volatility will remain extreme,” he said. “The difference between 68, 70 and 75 US cents could be a day or two of trading. “But in our six to 12-month view, we have the Aussie dollar higher on the expectation we’re maybe past the worst of the financial crisis. ” What a difference a year makes.
Just six months ago, currency experts were predicting the Australian dollar to reach parity with the US dollar for the first time since the days of a fixed exchange rate. But as the global financial crisis intensified, the Australian dollar fell, hitting a five and a half year low of 60. 12 US cents in late October as traders dumped commodities-driven currencies such as the Australian dollar, the South African rand and the Brazilian real. But BNP Paribas’ Ms Selvanathan says heightened risk appetite will be supportive of the US dollar in 2009, weakening the Australian unit in turn, as US investors shy away from investing abroad.
Japanese investors are also expected to keep selling the Australian dollar in exchange for the low-yielding Japanese yen, which could also limit any Australian dollar rally. State Street’s Mr Evans says the Australian dollar’s fortunes will hinge on China boosting its demand for commodities. “I’m not going to say 80 US cents until we see a recovery in China and Asia,” he said.