Protecting your business against currency volatility

A vote for Brexit, we were told, was unlikely. Until it was a certainty. 

Like the pollsters and the bookies before them, the markets got it wrong. The anticipatory rises in both the stock and currency market - prior to the counting of the ballots - represented a significant misunderstanding of the mood across the UK. These rises were quickly – and spectacularly – reversed as the result arrived in the small hours of June 24th, prompting commentators to search out synonyms for ‘seismic’ and ‘unprecedented’.

Now that at least some of the dust has settled, what is the future for the currency markets in the short to medium term? It’s certainly something a lot of people are asking (and may be why subscriptions to the Financial Times increased by 600% during the weekend following the vote), but it is particularly pertinent for businesses who operate on both sides of the Atlantic.
Sterling fell from a peak of $1.50 at dinner on the 23rd to around $1.30 today. The euro was not immune – whilst it rose against sterling, it lost 5% against the dollar in the direct aftermath of the vote.

Despite a brief post-Brexit bounceback, the abandonment by Chancellor of the Exchequer George Osborne’s of his 2020 fiscal target, and the suggestion by Bank of England chief Mark Carney that the bank’s historically-low base rate could be cut further, saw sterling fall again. Many economists are projecting that the pound will be at $1.15 or $1.20 by the end of the year, and some are even suggesting parity.

Buying Power

To put this into perspective, any US business wanting to pump money into their UK arm would have seen $1m buy them £0.67m on June 23rd, but £0.75m at the start of July. That’s 12% more value.

For US businesses looking to cross the Atlantic, conditions make it a great time to invest in expansion into the UK, given the buying power of the dollar on these shores. Is it worth holding off to see if sterling drops further? Possibly, but any further weakening in Sterling will mean future additional savings on operating costs -- so why not start now? 

For UK companies shipping products to the States, these doldrums offer a shot in the arm. Now is the time to push sales in the US (and the eurozone), hooking prospects with lower prices. The key here is careful management of cost bases to ensure that products and services remain competitive should sterling strengthen.

Currency planning

For businesses looking to lessen the effects of this volatility, particularly on the European side, smart currency planning is essential. For businesses that have income streams in multiple currencies, it is important to try and avoid unnecessary conversion – what you earn in euros, spend in euros. It may be attractive to push dollar earnings into UK activities, but any short term gains will be undermined if it then becomes necessary to make payments in the US from sterling funds. Businesses that don’t currently hold reserves in multiple currencies should think about doing so.

Where conversion is unavoidable, don’t leave it to your bank. Specialist low-cost transfer services can offer considerable savings, particularly if the amounts being transferred this way increase in size or frequency.

Hedge trimming

Exchange rates are likely to see continued volatility, as the UK works through the processes of Brexit. Each new announcement or milestone may have positive or negative effects on the strength of the pound. Whilst this volatility can make financial planning difficult, it also offers opportunities to negotiate fixed short or medium term pricing agreements with customers or suppliers that do not pay in sterling. For every business looking to cash in on the opportunities presented by these short-term slumps, another will be looking for long-term stability and may be happy to fix prices now based on a likely rise in sterling in the future.

Essentially, the only certainty is uncertainty. Rather than seeking assurances from the Treasury or the Bank of England, businesses have a responsibility to assess their own currency risks and limit their exposure to this volatility. It is important that this is done holistically, balancing the risks presented by the currencies collected against those spent. As such, the focus should be on cash flow rather than earnings.

Hopefully, we have all learnt a lesson about offering predictions. Leadership elections, legal challenges and localism are likely to have further unpredictable effects on the currency outlook, so follow Atlantic Leap on Twitter for rolling updates on how Brexit looks set to affect high-growth US and EU businesses. Sign up to the Atlantic Leap newsletter for the same.