Interview about the foreign exchange market

Q: Tell us a bit about yourself, your role in the company and what World First does.

A:  My name is David Smith, I am the dealing manager at World First Australia in our Sydney office. World First is a foreign exchange provider who handles overseas payments for its client base. We look after the full range of clients from private clients acting on their own behalf, through to SME’s and household name corporate clients.

Q: What exactly is the foreign exchange market?

A:  The foreign exchange market is the market for selling one currency in exchange for another. This can be for several different reasons, it can be as simple as people looking for money to go on holidays overseas, it can be for the purchase of goods or property from overseas, or it can be speculating on the potential value of a currency for profit.

Q: What are the main trends happening right now?

A: In Australia we are affected by most major trends in the world market. The Greece issue with debt has had an effect because it makes the shared Euro currency look less valuable. The continuing debt issues in the USA have had an effect because if the USA defaults on its debt this will have a severe effect on the risk appetite in the marketplace. Also, of course in the Australian market we rely heavily on any changes in the demand for resources from China. If China starts to experience a downturn (property values are already looking shaky) then Australia will suffer because less demand for commodities means less jobs and less jobs means less money being pumped back into our domestic economy.

Q: At what point in the business life taking an expert approach of exchange rates becomes important?

A:  It is important right from the start. Start ups are usually on tight margins to gain a foothold in the market place, so any savings in currency rates can be profit that new businesses sorely need. It also helps to learn as early as possible for forecasting. If a business is doing their forecasting and budgeting at an unrealistic exchange rate it may have a carry on effect in their profitability and cash flows, and may restrict how quickly a company can grow.

Q: What are the most important things to know when dealing with sales abroad and currency issues?

A:  The most important issue to resolve quickly is which currency you want to receive for the product/service you are providing, and how do you ensure that you will get the conversion you want.
If you want to invoice your clients in their countries currency to make it easier for them, how easy is it to convert these funds back into AUD. And if you are converting funds into AUD, how are you going to cover this exposure? If the rate on the day that you convert is worse than what you anticipated, have you lost profit? If you are at worse than anticipated can you wait for the currency to get to an exchange rate that you are comfortable?
The easiest way to avoid currency loss is too know your options in regards to conversion. If you have a set rate in mind can you lock this rate in now and take out any danger of the rate not being where you want it when you receive funds. There are several products available for companies to monitor the market, lock in exchange rates for dates in the future, or take advantage of any positive movement in the market so you can cover your exposure but still take advantage of any such movement.

Q: What exactly does World First do in this ecosystem?

A:  World First provides a service where clients can purchase or sell currencies , hedge exposure and take advantage of positive movement in the market, at exchange rates much better than they will receive using a traditional service provider such as their bank. World First provides a full international payments process for companies and individuals, essentially allowing them to send money overseas or receive money from overseas.

Q: What are the main benefits of using your services?

A:  The main benefits are price and service. Price speaks for itself, we buy from the same markets as the bank but because of our low cost business model we are able to take much smaller margins than the banks, with the savings being passed onto our customers.
Service is the main benefit for ongoing customer relationships. By having a dedicated broker our clients are better informed of their options, have someone they can call to offer an opinion, and have someone who can be their eyes and their ears in the marketplace so our customers can concentrate on what they do best – their businesses.

Q: Any notable transactions or customers you would like to mention?

A: Several but confidentiality stops me from providing too many details. The most satisfying customers are usually those who have been referred from an existing client who have never given a broker a chance, but once they try us they never leave. It’s always a great feeling when someone is so happy with what we have done for them that they are willing to tell colleagues, friends, suppliers and probably a few competitors how helpful we have been to their business.

Q: What’s the typical type of client that requires your services? Are there any size requirements?

A: We have a private client desk that deals with clients doing private transactions, and we have a corporate desk that runs the full gamut from SME’s and start ups, right up to household names. 90% of our client base are importers, but with the rampant AUD more and more exporters are looking at ways to minimize their losses from the markets. Our smaller clients tend to use our online service to handle their day to day invoices, while the bigger names take advantage of our expertise in alternative hedging strategies.

Q: What are the typical things that can be improved with your expertise?

A: Knowledge and pricing. Knowing the products in the market can be of huge importance to our clients. They can then make an informed choice about what product suits their individual needs, which has a carry on effect to a number of different facets of their business, like cash flow, profitability, speed of transfer/ delivery and terms of credit.
Pricing is improved and this allows the client to pass on any benefits directly to their clients, or increase their profitability.

Q: How did the crisis affect the exchange market?

A: The GFC had a huge impact on the market. The value of the AUD against the USD dropped 36 cents in the space of 4 months, causing a massive drop in most company’s profitability and ability to be able to trade in a restricted market. This was compounded by the lack of credit in the market with some competitors having to ask for 30% deposits on any hedging product just to lock in a rate.
The worst of this has now passed and companies are back to be able to handle hedging transactions without any roadblocks, but it has highlighted the importance of covering your worst case scenario.

Q: Can you also make transactions for a profit? How is it different from say the stock exchange?

A: You can make transactions for profit, however this is not the service that World first specialises in. The majority of the foreign exchange speculative market is done on margin, which means you can have greater gains than what you originally put in, but on the other hand you can experience greater losses than you originally wanted to lose.

Q:  Any advice for business thinking to export?

A:  Work out which currency you want to invoice your customers in. If it is the clients host currency make sure you can get it back to AUD without restriction (a number of currencies have restrictions on whether they can be exchanged from the country they are based in) and if you want to invoice in AUD make sure that the client can get an exchange to AUD and whether it affects how competitive you are in that market.

Q: Where can people find out more about the current market exchange news?

A: We have a daily update email which is written by our currency strategist Will Johnson, as well as a weekly update and two podcasts from Robert Malcolm on our website WorldFirst.com.au. Our London office also has a daily podcast from Jeremy Cook and Joe McKenna on the World First UK Blog.