The foreign exchange rate is the rate at which one currency can be exchanged for another.
In the Forex market, currencies always trade in pairs. Put simply, this means that every transaction exchanges one currency for another. So, if the USD/CAD exchange rate is 1.36, it costs you 1.36 Canadian dollars to buy 1 US dollar.
Exchange rates are constantly fluctuating due to several economic and political factors. These factors include inflation, industrial production, a country’s balance of trade and geopolitical or global events (pandemic, anyone?). Anything that has an influence on the value of currency can also have an affect on your business.This is especially true for businesses that import and export goods.
Here are the main ways FX rates can impact your business.
The US Dollar
The official currency of the United States of America is the world’s most traded currency. Many of the world’s most valuable commodities are priced in US Dollars.
Resources like oil, gold, copper, aluminium and aircraft are all priced in USD. Any business wishing to buy these commodities will have to do so in US Dollars. Even if they don’t use the currency, their suppliers will still have to.
If your country’s currency is weak against USD, you will have to pay higher prices to obtain these resources. Therefore you will have to charge a higher price for your product/service, which reduces your competitive advantage.
Raw Materials and Supplier Payments
Whenever you contract with an overseas supplier, you open your business to variations in the exchange rate.If the currency your business operates in depreciates (declines in value), this can cause problems for your supply chain.
For example, In 2007, one British Pound was worth €1.50. This meant that if a British garage wanted to import €1000 worth of engine parts from Germany, it would have cost them £666.
In 2009, the value of the Pound fell significantly – one British Pound was worth €1.10. Now, the garage would have to spend £909 to buy the same parts from Germany, and they would then need to charge a higher price for their service in order to make a profit. These changes serve to make them less competitive in the market, and less desirable to consumers.
On the flip side, when a currency appreciates, it strengthens in value. This means you can end up paying far less for materials.
For example, a Canadian company might have a shipping agreement with a company in Ireland worth €20,000. If €1 is worth $1.51, this agreement would cost $30,200. However, should the value of CAD rise by just 2%, €1 would be worth $1.47. The shipping agreement would then end up costing the Canadian company $29,400 – saving them $800.
Foreign Currency Conversion Fees
When it comes to international payments, businesses incur charges for converting currency both when they send and receive money. This is because banks charge a premium on foreign currency rates.
The rates you see on boards in banks/exchange bureaus are never that day’s true FX market rates. Almost all financial institutions will markup the price so that they can profit.
Many businesses use wire transfers to send money internationally – it’s a long-established method, but it can also be slow and quite expensive. When sending money to a country not using one of the world’s big currencies, banks will charge you substantially higher rates. The implication is that it’s difficult to send exotic currency, and that they’re providing great customer service by meeting your needs (and, of course, charging you a premium).
Oftentimes, banks will utilize an intermediary bank in the middle of your transaction. This occurs when banks don’t have established connections in the receiving country – funds are helped along by another bank that does. These intermediary banks will add their own charges in addition to the wiring fee.
Here at Remitr, we offer a FREE Global Business Account (GBA). This allows Canadian businesses to get paid in $, € and £ like a local business, in just 1 day…while saving up to 2% in currency costs and no forced conversions.
