Ever since David Cameron announced the EU Referendum back in February, there’s been a lot of movement in the value of the Pound – and since the results were announced, the majority of this movement has been downwards. This can create challenges for businesses that have exposure to foreign currency, particularly those needing to make payments to overseas suppliers. As the value of the Pound decreases, they may find themselves making the difficult choice between reducing their margin or passing the costs on to their customers.
We know that this is an issue that can keep business owners up at night. We polled our corporate clients on their Brexit concerns in March, and found that 51% were worried that their business would be worse off as a result of Britain leaving the EU. Research by accountancy firm Smith & Williamson in May suggested these worries were increasing as the referendum got closer, with four in five small business leaders expressing concerns. And, while it is too early to tell what the long term effects of Brexit could be, the Financial Times has reported that the current uncertainty is starting to affect small British businesses.
However, there are options for businesses that want to minimise their risk. HiFX can help you to hedge your foreign exchange risk with products such as forward contracts, enabling you to lock in the current exchange rate for up to three years for a small security payment. This means that your business will be protected if the Pound falls further and simplifies the planning of upcoming international payments, especially for expenses that you have already committed to such as paying invoices from overseas suppliers.
We spoke to one of our clients, a family-run furniture wholesaler based in the Midlands, about how they prepared themselves in the run-up to the EU Referendum vote. They have built a strong reputation for providing a consistent, reliable service at a competitive price, and are passionate about maintaining it. By hedging their foreign exchange requirements in advance, they entered the referendum period confident that their business was in a strong position, meaning they could get a good night’s sleep in their sturdy oak beds.
Q: How well prepared were you for the potential currency move in the lead up to Brexit?
We had more than adequate cover which could be described as a comfortable amount of cover right through to the end of our financial year. A few months before the vote, we had a number of conference calls with the HiFX team and they helped to guide us in implementing an FX policy to protect our business from adverse market moves. Needless to say we were kicking ourselves after the event that we should have done more, but this was purely hindsight.
Q: At what FX levels had you hedged at?
We had some really good contract rates for our hedges in the high 1.40’s and even one at 1.50 just before Brexit.* Compared to recent levels in GBP/USD, this has given us a buffer of well over 10% which has really helped and means despite the disruption of Brexit we can continue to provide our customers with usual pricing for now; however ultimately this will lead to price increases.
Q: Do you recommend hedging?
It is because we plan and hedge our requirements that we remain profitable as a business and therefore we can continue to give our customers continued service while a lot of businesses that have not been prepared may not be able to survive a move like this. So yes I would recommend hedging as it gives you time to prepare.
Unfortunately it is unlikely that we will see the highs of 1.50 mentioned here in the near future. However, while the overall movement of the Pound recently has been either static or down, there have been several recent boosts to its value, for example after Theresa May was confirmed as Prime Minister and the Bank of England voted to maintain interest rates at 0.5%. Businesses may wish to consider setting up forward contracts during spikes such as these, so the rate is available to them at a later date when it is needed. HiFX users also gain access to personalised rate alerts, which can help to take advantage of these opportunities.
Whatever your foreign exchange needs, HiFX has a range of solutions that could help you to support your business through the current volatility. If you’d like to discuss your situation in more detail, please call our Corporate Team on +44 (0) 1753 623 555.
You can view all our Brexit resources here.
*These rates are provided for indicative purposes only, based on previous customer experiences. Rates will vary depending on a range of factors, including the current interbank rate, the amount you are sending, the currency you are buying and your payment method. For a quote, please contact us.
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