Welcome to foreign exchange insight from XE to support businesses that send or receive international payments.
Political and economic events in recent years have shown how unpredictable the currency markets can be. On the day following June’s EU Referendum, the Pound dropped 12% against the Dollar. A few months later, the Flash Crash in October.
As well as ongoing Brexit uncertainty, a number of other global events have also been influencing the currency markets. The election of Donald Trump created volatility in the currency markets. His actions caused fluctuations in the value of the Dollar against the Pound and other currencies. Elections in France, Germany and now the UK also created some short term volatility.
While a weaker Pound can provide a great opportunity for British exporters, it can present challenges to companies that rely on importing. The weaker currency has put companies of all sizes in the difficult position of having to decide whether to reduce profit margins or increase prices.
How exchange rates can affect your business
It’s understandable that in the drive for growth and profitability, foreign exchange is less likely to be seen as a priority for businesses. But movements in the currency market can have a significant impact on your bottom line – for better or worse.
For example, the fall in Sterling helped to make exporters more competitive overseas. As a result, British factories saw their strongest export orders in six years in early 2017. The weaker Pound has also provided boosts to the FTSE 100, which is dominated by multinational companies that benefit from the weaker currency.
On the other hand, a weaker Pound increases costs for UK businesses that need to pay overseas suppliers. Sterling hit a high of 1.49 against the Dollar shortly before the EU Referendum, but fell as low as 1.20 in mid-January. So if a business needed to pay an invoice in Dollars when the Pound was at its lowest point, they may have ended up paying almost 20% more than they would have done seven months earlier.
How can businesses reduce the risk of currency fluctuations?
As we’ve seen in the post Brexit referendum environment, movements in exchange rates can impact businesses in a variety of ways.
Some businesses that need to make international payments were able to minimise the impact of Sterling’s fall by hedging in advance of the EU Referendum. But for a hedging strategy to work effectively, you first need to have an awareness of what your company’s exposure to foreign exchange is.
One of the most common mistakes we’ve seen for businesses with international payment requirements is simply not knowing how exchange rate movements can affect their bottom line. This can make it difficult for them to mitigate the risks of currency volatility, and they may end up making snap decisions in reaction to market movements that could prove costly in the long term. If you’re not sure where to start, you may wish to consider reviewing your options with an FX specialist such as XE.
If you’d like to discuss your business’ situation in more detail, please contact your local XE office.
To learn more about the most common mistakes that businesses make when making international payments – with tips to help you avoid them – read our blog, Managing Currency Exchange Risk.
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