With recent news reports claiming retailer Sports Direct has suffered a 60 percent drop in profits as a result of a weaker pound, businesses with FX exposure are urged to act now or face being the next victim of a volatile currency market.
Paul Langley, managing director of Godi Financial suggests businesses are hedging too late when it comes to FX management and are subsequently paying for the consequences of such neglect.
For Sport Direct – whose pre-tax profit fell from £275.2m to £113.7m – the decrease in the value of sterling has meant the firm has had to pay more for the goods it imports. Having an inadequate currency hedging strategy in place to manage sterling’s instability following the European Union (EU) referendum to purchase these goods, has been to blame for such losses.
Brexit will continue to dominate the overall trading range of sterling in the coming months and years, making it crucial for businesses to prepare for more short- to medium-term movements that will inevitably occur through a combination of economic and political factors.
Sterling not only took a big hit following the EU referendum, but also with the aftermath of the UK general election. The disastrous Conservative campaign, which saw Prime Minister Theresa May controversially pledge an additional £1billion to Northern Ireland to get the Democratic Unionist Party (DUP) on board and support her slim parliamentary majority, sent sterling tumbling once again.
Since then however the pound has recovered against the US dollar in particular, albeit that is due in part to US Dollar weakness. Subsequently, there have been opportunities for importers and those with US dollar requirements to capitalise on favourable movements. Ahead of the release of UK inflation data on Tuesday morning (18 July), for example, the GBP/USD currency pair traded to a 10 month high of 1.3125 as markets and investors’ expectations of a Bank of England (BOE) rate rise continued to grow.
These expectations were a result of recent commentary from BOE members, coupled with the unexpected 5-3 vote at their previous monetary policy meeting. The inflation figure however came back at 2.6 percent, which was down from the expected and previous print of 2.9 percent.
As a result sterling plummeted and now at the time of writing, is trading down at 1.2936. This near 2 cent swing in the space of two working days could have a massive impact on a company’s bottom lie.
Paul Langley, managing director of Godi Financial, commented:
“Since the further depreciation in sterling after the eventful UK election, we continue to see sharp intraday movements in the currency against its major peers. Concerns surrounding the Conservatives’ less than ideal agreement with the DUP alongside initial opening negotiations with EU officials in Brussels mean that these types of movements will be here for the short- to medium-term at the very least.
“Businesses with exposure to currency movements – whether that be selling products overseas to foreign clients or importing goods from suppliers abroad – need to make sure they are aware of the risks involved through not addressing their FX exposure. This risk can and will affect a company’s bottom line if left ignored, as demonstrated recently by some large corporates such as Sport Direct.
“Being the wrong side of a falling pound has been disastrous for many organisations. A one or two percent movement in sterling may not be of major concern to some. For businesses that are transacting large amounts of money into or from a foreign currency however, these moves can be costly. A robust FX strategy shouldn’t be feared. In fact, it should be welcomed.”