UK SMEs are failing to protect themselves from the uncertainty of the US election, leaving them exposed to a £34.6 billion currency risk, according to World First’s Q3 2016 Global Trade Barometer.
Businesses buying US dollars have shortened the length of their forward contracts significantly, dropping from an average of 90 working days per contract to less than 70 days.
This shortening – a decrease of over 22 per cent – will leave the majority of USD-buyers unhedged beyond the Christmas period, despite the potential for greater volatility driven by the presidential election result and a potential interest rate hike by the Federal Reserve.
With over a quarter of UK SMEs (28 per cent) trading dollars, the risk to their business should currencies swing the wrong way is potentially high, World First says.
This, paired with a volatile sterling, could leave those gambling on the result in a difficult position should the dollar strengthen as a safe haven currency in the event of a Trump win.
Jeremy Cook, chief economist at World First, thinks that the ramifications of SMEs not hedging forward the dollar for a greater period of time after the US election could be significant in the early months of 2017.
Cook advises that many businesses that left themselves unhedged by gambling on a Remain vote were caught out by the surprise result, and these businesses should make sure they don’t make the same mistake twice.
He adds, ‘Practically speaking, if hedging contracts are left to expire, those who import from the US will have to revert to spot rates.
‘This will likely be detrimental to margins and introduce prices pressures to the UK consumer, potentially becoming the catalyst for a wave of ‘cost-push’ inflation in the first six months of 2017.’
Brexit presents a mixed picture for UK SMEs
Following the UK’s decision to leave the EU, foreign currency trading has picked up over the last quarter with both the euro and the dollar bouncing back. 37 per cent of SMEs identify the euro as the most common currency traded this quarter, compared to only 30 per cent in Q2. However, this is still down from the highs of Q1 when the figure stood at 49 per cent.
Additionally, World First’s data shows that by number of trades, payments reaching the EU fell more sharply (-11.8 per cent) than those reaching the rest of the world (-3.2 per cent) in Q3.
Moreover, 49 per cent of SMEs disagree with the statement that the outcome of the EU referendum vote had been positive for their business’ future prospects, an increase from the days immediately following the referendum result at the end of Q2 (46 per cent). 25 per cent agree that it has been positive (28 per cent Q2), 27 per cent say they still didn’t know (25 per cent Q2).
Volatility here to stay
Given ongoing political and economic uncertainty with the US election and the slide in the pound, a growing number of SMEs are feeling the impact of exchange rate movements. In Q3 28 per cent of businesses feel negatively affected by the drop in sterling, compared to 23 per cent in Q2. A quarter (23 per cent) say volatility had impacted investment decisions in the quarter, similar to Q2 (24 per cent), but an 8 per cent jump from Q1 (15 per cent).
However, UK SMEs are more sanguine about the quarter ahead as 38 per cent admit that they are worried about currency volatility in the next three months, down from 46 per cent when asked at the end of June.
Cook continues, ‘Calling 2016 an eventful year politically and economically would be a bit of an understatement and SMEs have certainly felt the impact that momentous events like Brexit and an unpredictable US election have had on currency volatility. With sterling tumbling over Q3, it is unsurprising that many businesses have felt the need to alter their investment decisions.
‘Nevertheless, it’s not over yet and as we head into a fraught US election which could bring up more surprises, UK SMEs need to brace themselves for a bumpy road ahead. We’ve seen the pound fall against the dollar by record amounts over the past few months, and for businesses without the right foreign exchange protection this can add a lot of pressure on margins.’
According to World First’s data, emerging markets had a far more favourable quarter. Payments to Zimbabwe, Peru and Vietnam all grew by double-digit percentages, with eastern European destinations also faring well: Romania, Estonia, Latvia and Slovenia all saw inflows increase.