Currency markets – what does it mean for the travel industry?
ABTA, October 2007
What does the currency markets mean for the travel industry?
The recent credit crisis has led to mass risk aversion in the financial markets, most notably in global equity markets but also in the currency markets. What do we mean by risk aversion? Investors who have taken positions in the market decide to close these positions in order to neutralise their risk and instead look towards safe havens such as government bonds to shelter their money. It is important to remember that 97% of transactions in the foreign exchange markets are speculative, so a change in sentiment/appetite for risk can have a dramatic impact on the markets.
For example, a travel company booking holidays in Australia will have an exposure to GBP/AUD. As carry trades became unwound, GBP/AUD pushed higher from a low of 2.3098 (26/07/07) to a high of 2.5640 (17/08/07) representing an 11% move in just three weeks. In contrast, the move that followed as risk appetite returned, was 12.4% back lower again.
What has been the impact on Sterling? The recent credit crunch has had dramatic effects on institutions such as Northern Rock, who rely on the money markets for funding. During times of uncertainty, bank’s refuse to lend to each other in the wholesale money markets leaving banks like Northern Rock unable to operate their day to day business. If this were to continue, with more banks having the same problem, the fear is, that this may have an adverse impact on the UK economy and hence Sterling would continue to suffer.
So, what does this mean for UK travel companies marketing holidays overseas?
The primary objective of any finance director, when managing foreign exchange risk, is protecting the company’s bottom line. Frequently however, an overseas deal will be meticulously costed, negotiated and executed, only for anticipated profits to be subsequently wiped out by fluctuations in the currency markets. These movements are beyond the control of individual organisations, but they have a real and significant impact on profitability and cash flow. In addition, the risk created needs proactive management and few organisations have the resources or market expertise to manage this.