From the surprise Brexit result to Trump’s election as President, 2016 has been full of curveballs. For British businesses trading overseas, the impact on currency has been hard to miss.
Next year, there could be more uncertainty to come, with further knock-on effects for the pound. This will bring both opportunities and risks – so for businesses to succeed, they need to have a good plan in place.
Here, Alex Edwards from UKForex shares his thoughts on how to prepare.
Brexit means…business uncertainty, but also opportunity
Political shocks unsettled the markets in 2016, creating an unpredictable business environment for those trading internationally.
We have already seen the challenges this has caused for some well-known companies. The post-Brexit fall in the pound has led several brands to announce price increases, or reductions in the size of their products. Marmite became a lightning rod for these issues in October, after a dispute between Tesco and Unilever over price increases became headline news. Whether you love it or hate it, it was clear that the Marmite furore was a direct result of the collapse in the value of the pound. Many British businesses have faced similar dilemmas, with the effects of the steep fall in the pound already hitting their supply chains.
On the flip side, other businesses have profited from the pound’s fall. British exporters are feeling the impact, for instance, as their products are now cheaper for overseas customers. Similarly, many companies that locked in forward currency contracts before the EU Referendum are benefitting from the pound’s subsequent collapse.
The international outlook
Of course, currency uncertainty is not confined to the UK. The impact of Donald Trump’s victory on exchange rates has, so far at least, been less dramatic, with financial markets initially responding positively to the US election result and Trump’s appeasing tone during his acceptance speech. However, it’s still too early to say whether the medium-term outlook is positive for the pound. Central banks are cautious and are telling us they’re closing monitoring the reaction of financial markets.
Closer to home, the French presidential contest in April and May, and the German elections in Autumn, are also likely to have a significant impact on British businesses. The results of those elections are likely to have a major impact on both the Eurozone and Britain’s hopes of a favourable Brexit deal. To be prepared, businesses that sell to, or buy from, Europe or the US, should therefore make sure that they can weather currency fluctuations throughout the year.
Planning for 2017
This uncertainty makes life increasingly complex, but certainly not impossible, for small and medium-sized businesses that could be buffeted by political and macroeconomic forces beyond their control.
While there is no way of knowing exactly what will happen in the new year (who could have predicted the series of unlikely events that have come to define 2016?) there are several ways that small businesses can take control during unpredictable times to manage currency fluctuations and successfully mitigate impacts to their bottom line.
Think strategically
The first step businesses need to take is to analyse their possible exposure to market volatility and develop a currency strategy to protect themselves.
An effective strategy for dealing with currency can provide your business with a buffer against sudden movement in exchange rates. This can help prevent the kind of overnight losses that some businesses experienced around Brexit.
Know your options
To get the best currency exchange rates, you will often need a specialist partner. If you haven’t already, I’d recommend looking beyond your bank to get more competitive rates and superior service.
When choosing an international payment provider, do keep in mind that pricing models differentiate from one company to the next, so do your research and read the small print. This will allow you to make an informed decision. To get the best deal, always speak to potential providers and ask them to give you a quote based on your company’s specific requirements.
It’s also important to look beyond good exchange rates. Sign-up fees, transaction costs and monthly subscriptions will all decrease your returns, and could be a nasty surprise if you haven’t planned for them up-front.
Consider your supply chain
As well as international sales, currency fluctuations could impact your business’ supply chain. The fall in the pound is likely to have already affected costs for businesses buying from overseas suppliers.
Even when monumental national and international events aren’t on the horizon, it’s still imperative that you pay attention to your supply chain, and how it may be affected by currency movements.
Tools of the trade
There are three handy tools that can help you manage currency risk: forward contracts, limit orders and spot trades.
Forward contracts allow businesses to purchase foreign currency at the current rate, and agree to receive the funds at some point in the future – a good way to defend against any future changes that might negatively impact your organisation. They can act as a buffer if you want to lock today’s rate in for the future.
If currency fluctuations could well serve your interests – for instance, if you’re after a stronger pound, or can wait for it to slide further – limit orders might be the way to go. Limit orders effectively mean that you can nominate a preferred exchange rate in advance. Your funds will be automatically transferred once that rate is reached by the market.
Finally, spot trades are made on the day, at the current exchange rate. These transfers will often be used in combination with forward contracts and limit orders to create a strong currency strategy. Depending on your appetite for risk, and your ability to keep a close eye on the market, you could decide to allocate some money to trade on the spot. This way, you won’t lose out if the exchange rate moves in your favour.
Knowledge is power but preparation is paramount
As we look ahead to what is likely to be a turbulent 2017, businesses with a solid currency strategy in place can smoothly navigate the choppy waters ahead. But however good your strategy may be, you still need to be reactive, so make sure you stay on top of international news and events to refine your plans when needed.
Alex Edwards is a currency expert at UKForex.
Further reading on business uncertainty
