For any business importing or exporting, dealing in foreign currencies is an unavoidable prerequisite. Despite this, we are continuing to hear of companies blaming unforeseen movements in the currency markets as a key driver for poor performance. Halfords, Sports Direct & Easy Jet are high profile examples who reported significant financial loss this year due to currency volatility. Is such an oversight of what is now a fundamental part of international trade really a palatable excuse as we head into 2018?
The volatility in the foreign exchange (FX) markets caused by seemingly constant political and economic upheaval has resulted in increased uncertainty and this will inevitably continue in the medium term – making the implementation of a robust strategy for managing currency fluctuations a modern business imperative.
For UK based companies that deal overseas and in currencies other than Sterling, the past 18 months has been particularly challenging following the UK-EU Referendum. Whilst it has opened up a potentially golden window of opportunity for UK Exporters, it has been nothing short of disastrous for UK importers who have seen their costs sky-rocket due to the dramatic decline in Sterling. At one point GBP/EUR had dropped close on 18% from pre-referendum levels, and even now at 1.1350 stands down some 13.5%. Similarly GBP/USD having hit a high of 1.5018 on the evening of the referendum had declined by 21% during October 2016, however due to broad-based US Dollar weakness since then (reasons include President Trump, North Korea & Hurricane Harvey/Irma) at the time of writing the rate is now down just 10.8% at 1.3385.
Continued political strains are adding fuel to the fire. Only last week we saw further volatility to the GBP/EUR exchange rate as the UK reached a breakthrough deal with the European Union to continue Brexit negotiations on to the next phase.
From a more technical perspective, Sterling has been stuck between a rather wide range of late. If it can climb through (and maintain above) 1.1450 versus the Euro we may well see some good follow through to the 1.2000 area which would please both UK importers and holiday-goers alike. But further weakness back below 1.1000 versus the Euro would send out concerns to both traders, investors and the general UK public.
Against the US Dollar it’s a far trickier one to call. As already mentioned, a weaker USD has been the driving force behind the current levels and it could be argued that we’ll continue to see this trend in to 2018.
All that considered, foreign exchange risk management should be a key focus of any finance director or CFO but particularly those working within a small-to-medium sized enterprise (SME). For large corporates, being careless about currency risk can have a huge impact, however for SMEs it can be catastrophic. This makes it all the more surprising just how few SMEs are putting plans in place to minimise their exposure to currency fluctuations.
For those who don’t have an effective strategy in place, there are tools available to help manage and ‘hedge’ this currency exposure. Forward contracts can be an effective way to minimise or eliminate FX risk. A forward contract allows you to fix the current exchange rate for a settlement at an agreed date in the future, making your FX a fixed cost. This can help provide certainty over the costs of your international payments enabling you stabilise your cash flow, protect your profit margins and reliably forecast.
If you can accurately forecast your quarterly/annual revenues and expenditures that will then allow you to lock in a percentage of that exposure for settlement at a future date, negating a large part of your risk to currency fluctuations.
SMEs should look to work with a trusted FX provider who will take the time to analyse your company’s exposure and really explain what kind of hedging products, such as a forward contracts, are best for your business.
At Godi we specialise in helping SMEs put in place the right currency hedging strategies while also reducing the costs and fees of FX transactions – a service that high street banks and large FX brokers have been lacking to provide.
Protect your business against the risk of currency volatility.
Request a free review of your currency exposure
To help protect your business against the risk of currency volatility and take control of the costs of your international payments, take advantage of our complimentary foreign exchange review.
This review can help you better understand the effects of exchange rate fluctuations on your specific business operations.
The no-obligation currency strategy review includes:
- An assessment of your foreign exchange risk and cash flow.
- A price comparison versus your bank or current foreign exchange provider – this is a useful way to uncover the true cost of FX transactions and any additional & unnecessary fees charged.
- Recommendations and strategies to help to reduce your currency exposure.