Bring home export earnings safely
Exporter Magazine, Issue 8, September 2008
Bob Eldin, September 2008
Foreign Currency Accounts are among the financial tools exporters can use to make forex transactions more effective. They also enable an exporter to make the most of currency shifts.
An account holder could hold American-dollar payments in a US-dollar account, for example, then wait for the US dollar to depreciate before converting back into New Zealand (NZ) currency.
Essentially, FCAs (as the bankers call them) allow exporters to transact swiftly and efficiently with overseas trade partners.
Andrew Gurney, head of foreign currency accounts at ANZ National Bank, says the main advantage is to allow an exporter to do business overseas without having to convert receipts back to NZ dollars. The exporter can net foreign currency transactions, eliminating the exchange risks associated with buying into and out of another currency.
Without an FCA, says Gurney, “you are reliant on what the exchange rate market is doing at the time when funds are brought back into the NZ-dollar accounts.”
Multiple accounts
If you deal with several different currencies, you will need several different FCAs.
Opening and operating these accounts is a normal part of business for exporters of all sizes, says Mike Hollows, director of trading at HiFX.
The key to using them is getting good advice and good governance around why and when your company converts and does not convert currencies. The timing and the reasoning behind converting is critical.
All banks offer FCAs. The ANZ and National Bank, for example, offer three types of foreign currency account:
• Foreign currency call accounts are held in the foreign currency the exporter specifies. They make managing payments and receipts in foreign currencies simpler. Recently received foreign currency can be held in anticipation of a more favourable exchange rate, or foreign currency can be bought at a known exchange rate and held until payments are due. These accounts can also be used to settle international transactions arranged through your bank. Transactions costs – inward and outward international money transfers, drafts and so on – depend on the nature of the transaction. International money transfers overseas would cost $25 each time funds are sent overseas. Accounts are available in many currencies.
• Foreign currency investment accounts help exporters save for a significant expense or purchase while earning premium interest.
• Foreign currency term deposits let exporters earn competitive interest on surplus foreign currency funds without the costs or exchange rate risk involved in converting them into NZ dollars. Terms start from 30 days and a minimum deposit of NZ$5,000 equivalent is needed. At the end of the term the money can be withdrawn, or all or some of the funds re¬invested.
Fees and charges vary among the banks and on a case-by-case basis. Interest rates differ, too, subject to market rates overseas less “a small margin” built in by the bank in NZ which holds your FCA, a National Bank forex adviser said
Mike Hollows cautions that some costs are likely to be hidden. Funds invested in a US-dollar foreign currency account should attract close to the prevailing wholesale US-dollar cash interest rates.
“But I suspect some banks are paying significantly less interest than they are receiving,” says Hollows. “Therefore, the client never really knows what they are fully paying for the account.”
Describing his firm as an independent, fully deliverable, FX risk-management company, he advises that – if there weren’t costs involved and if he was getting paid a fair interest rate – “I would say these accounts are very useful. You can park your money there and not necessarily convert it back into NZ dollars when you receive payment in, say, US dollars from American clients.
“But you will need sound advice and sound governance around what you are doing to make the account work for you.”
Why FCAs?
Other considerations when managing an FCA will depend on the export company’s financial health, Hollows says.
“If your company is relatively cash-rich and has no immediate requirement to convert its receipts back into NZ dollars, and if you believe the NZ dollar is going to depreciate against the US dollar, you could wait and convert at a later time. “In other words, you are sitting on US dollars.”
But When do you convert?
The market at time of writing [August 29] showed the NZ dollar around US70c. It might have been worth waiting until the rate had slipped to around US68-69c, leave a foreign exchange order in the market, and if it was achieved, use the US dollars in the FCA account and convert to NZ dollars at the preferential rate
The risk is if the NZ dollar moves the other way, which is why Hollows emphasises the need for good advice.
Suppose you are running a Kiwi-dollar overdraft. You then need to seriously look at whether it’s worth leaving US dollars in your FCA because of much higher domestic NZ-dollar funding costs. In other words, the US dollar will be attracting deposit rates of 2% or less with a NZ-dollar overdraft of 10% or more. In that case, you may look at a foreign currency swap, which allows you to swap your US dollars into NZ dollars today, but also to swap the NZ dollars back into US dollars at a future date.
The benefit is that you can effectively use the US dollars to NZ dollars via the foreign exchange markets and the wholesale interest rate markets at, probably, a preferential rate to the rate charged by your bank’s overdraft facility. If the NZ dollar falls over time, as hoped, the exporter sells US dollars and buys NZ dollars and offsets this against his future-dated contract which can be pre-delivered and cash-settled. It must be noted a swap in no way constitutes a hedge against adverse NZ-dollar appreciation so the swap would need to be incorporated with a sound strategy to protect the company should the market move adversely higher.
Never a straight line
Developments in August further highlight the need for sound advice. Several newspaper headlines were proclaiming the NZ dollar’s fall toward US65c. This heralded the good times returning for exporters.
The NZ dollar was still technically in an uptrend “and we warned a lot of our exporters along those lines,” says Hollows. “We managed to get quite a few of them, including those with US dollars in foreign currency accounts, to sell their US currency and buy NZ dollars, certainly for the next two months.”
By 22 August, the NZ dollar had risen back to US72c.
New Zealand exporters have no control over the forces driving the exchange rate – the oil market, for example, and gold (prices had jumped sharply over a few days). Broadly, these were driving up commodities and the US dollar was weakening, which means the NZ dollar was rising against the US.
There was an appreciation of almost 6% in 10 days for the NZ dollar and, as Hollows urges, “that’s bottom-line stuff, which is where some good, timely advice is necessary just to take out some of the hype.”