Welcome to In Conversation, foreign exchange insights and discussions from HiFX to support businesses that send or receive international payments.
The foreign exchange markets have become more and more liquid over the years as global trade has increased, with a daily volume of US $5.3 trillion. More international trade can present some exciting opportunities for both large and small companies across a wide range of industries. But, as the last year has demonstrated, foreign exchange exposure can also present a risk to companies if the rate moves against them.
Political and economic events both in the UK and overseas have the potential to cause exchange rate fluctuations, which can either eat into a company’s profit margin or force them to increase their prices and potentially become less competitive. We’ve taken a look at events that could be a potential concern for businesses with foreign exchange exposure and some options that could help them manage this risk.
Brexit has, of course, been the primary factor affecting the value of Sterling in the last year. On the day the EU Referendum result was announced, the Pound dropped 12% against the US Dollar. It has continued to fluctuate since, from a high of 1.49 on the day of the vote to as low as 1.20 in mid-January, when there were the first suggestions that Theresa May was planning to pursue a hard Brexit.
This means that, if a UK business needed to pay an invoice to a supplier in Dollars when the Pound was at its lowest point in January, they may have ended up paying almost 20% more than they would have done seven months earlier.
And, following last week’s surprise General Election results, it is uncertain what will happen next for the Pound. When exit polls were announced at around 10pm on 8th June, Sterling immediately fell 2% against the Dollar and the Euro, and it has continued to fluctuate since then. There was a small bounce the following day after suggestions that the weaker Conservative mandate could lead to a softer Brexit. However, ongoing concerns about what could happen next may put further downward pressure on the Pound.
With so much uncertainty about the future, it seems likely that this volatility could continue for some time.
It is worth remembering that exchange rates are a ratio between two currencies. So if something happens overseas to weaken a country’s currency, the Pound can strengthen as a result – or vice versa.
For example, there have been some fluctuations in the US Dollar since the surprise election of Donald Trump last year. At first, there was optimism that his plans to cut taxes, reduce regulation and increase infrastructure spending could help to boost the value of the Dollar. But more recently, there have been concerns about weak economic data and questions about whether Trump will be able to move his agenda through Congress. There have been suggestions that the ‘Trump bump’ is over, causing the US Dollar to reach a seven month low at the start of June.
Meanwhile in Europe, there appears to be an increase in confidence, following a positive result for Emmanuel Macron at the first round of parliamentary elections. Macron’s success in the presidential elections in May provided a boost to the Euro as markets preferred him to the far right Marine Le Pen, but there was some concern about how effective he would able to be with a party established just over a year ago. A strong result at parliamentary elections could help to allay these fears and provide a boost for the Euro.
It also seems likely at this point that Angela Merkel will secure a fourth term as German Chancellor at Federal Elections in September. There were questions earlier in the year about whether she was losing ground to the far right Alternative fur Deutschland party and the left wing Social Democratic Party. However, her campaign has been given a boost following positive economic data and success at a recent state election in North Rhine-Westphalia.
But while European politics appear to be stabilising, there are still some lingering economic concerns. The Euro fell against the Dollar recently following reports that the European Central Bank were expected to cut their inflation forecast, which could potentially prolong its controversial quantitative easing programme.
What does this mean for my business?
If your business sends or receives international payments, currency moves can potentially have a detrimental impact on your bottom line. But there are ways you can look to protect your business from adverse moves.
The first step is to understand your exposure and the potential risks to your business. Once you have an understanding of this, you can develop (or review) your company’s FX policy to ensure you have a plan in place, whatever happens next. Then you can start to take a look at the various hedging products on offer that could help you to mitigate your risk – these include forward contracts, FX options and FX structured products. These products have all been designed to help companies mitigate the risk of negative exchange rate movements in different situations.
We’ll be taking a look at this in more detail in our CIMA Bitesize Briefing sessions, including:
• Risk identification
• Quantification of the risk elements
• FX strategy and implementation
• Execution of spot, forward and FX options and FX structured Products
• Pro and cons of different hedging tools with scenario analysis
• Market timing
Register now to join us at the free breakfast seminars in London (21st June) or Bristol (22nd June) and learn more about how you could protect your bottom line from the impact of currency fluctuations.
If you’d like to discuss your business’ situation in more detail, please call our Corporate Team on +44 (0) 1753 752 626.
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