By Greg Smith, head of trading at foreign exchange firm Global Reach Partners
Small companies in the UK which are focused on the export market, along with those which rely on imported goods, will know first-hand the volatility that recent currency fluctuations can have on their business.
Last year, when Sterling felt the impact of the vote to leave the European Union, businesses had to quickly come to terms with the fact that it sank by 20 per cent against other major currencies. Since then, the pound has remained low and been unable to claw back losses, as uncertainty and the potential for real instability lies ahead as the UK negotiates its terms of departure from the EU.
One insight into the medium to longer-term prospects for the pound has come from Deutsche Bank currency strategist George Saravelos, who recently said Brexit is “anything but priced in”, suggesting it could endure a lot more pain before making any recovery.
For small businesses operating in the import/export market, the value of the pound is not their only concern. There is also the potential for sudden movements of other key currencies to affect their profitability. This year, for example, European elections are creating a basis for further currency uncertainty for the Euro. The outcomes in key electoral contests have had the potential to see other nations opting to follow the path of the UK with the real prospect of the disintegration of the EU.
So far that seems to have been avoided in both the Dutch and French elections where we have seen more moderate candidates prevail. However, later this year Germans go to the polls, presenting another possible threat to currency stability.
In this election, which takes place on 24 September, Chancellor Angela Merkel will be running for her fourth term at a time when she has seen a significant fall in her popularity. The refugee crisis in 2015, which saw Germany welcome 1.1 million people from countries like Iraq, Syria and Afghanistan, has been followed by some high-profile terror incidents in the country which have adversely affected Ms Merkel in the polls.
While the forthcoming contest now looks set to be a fight between Merkel’s centre-right Christian Democratic Union and Martin Schulz of the centre-left Social Democrats, it’s difficult to predict at this stage whether more radical, anti-EU parties might gain further traction during the campaign; all of which could impact the stability of the single currency.
It is therefore vital for small firms to implement a robust and comprehensive risk-management strategy to minimise their exposure to foreign currency movements which often result from political uncertainty. UK SMEs with foreign currency requirements will need to conduct their transfers strategically and intelligently to ensure that they manage their exposure in a time of extreme upheaval and erratic market movements.
The first step is for a business to understand their exposure to currency, which usually leads to a budget rate and hedging strategy. Using a combination of forward contracts, spot deals and orders according to their strategy can provide certainty and protection, shielding their bottom line and maximising the funds they receive.