First-time UK exporters would do well to take advantage of the current surge in strength experienced by the euro, the European single currency. Foreign exchange research director at payments company OFX, Jake Trask, advises readers on how best to approach a currency strategy.
At the start of 2017, the euro was in real trouble. Populist elections in France and the Netherlands looked set to destabilise the single currency, with “Frexit” and a return to France’s franc looking like a genuine possibility.
Since then, the political far right has been soundly defeated in both countries, and the euro has rebounded in response. The single currency is now the market’s star performer, and its current strength looks set to stay for a while yet.
For British businesses selling internationally, that’s no bad thing. A strong euro ensures sterling-denominated goods are more attractive for European buyers, and has encouraged many British businesses to increase their focus on overseas sales.
In fact, a recent study by OFX found that 36 per cent of small UK businesses plan to start or increase exports in the next 12 months to take advantage of the situation.
If you’re planning to do the same, or are curious about your export options when faced with a strong euro, the following tips are for you.
Understanding the impact of a strong euro
A strong euro has been good news for British exporters, who have been making the most of exchange rates, unseen since the 2008 financial crisis, to increase sales to Europe.
For importers, however, it’s quite a different story. A strong euro has made it more expensive to source goods and raw materials from Europe, and many companies have found it challenging to keep costs down and avoid raising prices.
But, though the current exchange rate is far from ideal for importers, there are still ways to protect yourself from further volatility. An expert currency partner can help advise you on the best way forward.
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Your currency options
Whatever your situation, it’s always best to consult an expert about the correct approach for your company. There’s no such thing as ‘one-size-fits-all’ when it comes to a currency strategy, and your best option is to choose an approach that’s tailored to the needs of your business.
An expert advisor will assess these needs, as well as your appetite for risk, to come up with a plan that’s made up of some or all of the following components.
(1) Forward contracts
Forward contracts allow you to lock in today’s exchange rate for transfers up to twelve months in the future. This is a great option for British exporters who are benefitting from the euro’s strength, and who want to protect their current competitive advantage against a potential decrease in value.
It could also work to protect importers worried about a further strengthening in the single currency.
Though it’s never possible to predict the future of the currency markets with total accuracy, a currency specialist will highlight factors that could affect the euro in the months to come, and help you decide whether this option makes sense for your firm.
(2) Limit orders
Limit orders allow you to nominate an ideal exchange rate at which your money is automatically transferred, as and when it is reached by the market.
For businesses that are willing to watch and wait, this can be a powerful tool – it enables you to profit from further movements in the market, whilst giving you the freedom to get on with other work.
Often, limit orders are combined with forward contracts to allow businesses to protect some of their future transfers from wild volatility in the markets, whilst also allowing them to benefit from favourable currency movements in the meantime.
(3) ‘Virtual’ accounts
For some businesses, euro-denominated virtual accounts are a clever way to take payments from European buyers without immediately transferring them back to sterling. This allows you to choose when you make your transfer, waiting for your moment to pounce on a good exchange rate.
They can also help you avoid the challenges of a weak pound, if that’s an issue for your business. That could mean transferring your euro-based revenues directly into another currency without ever touching the pound, which is useful if you pay suppliers in a third currency like the US dollar.
(4) How long can the euro stay strong?
Although the euro’s current outlook is healthy, it’s always smart to keep an eye out for future challenges, so you’re not caught unawares by major events that could impact the euro’s value.
The Eurozone crisis, for example, could well raise its head – there are still huge disparities between strong economies like Germany, and other weaker states like Greece and Romania.
It’s also worth remembering that the euro’s strength is partly due to the relative weakness of other currencies. In the UK, the pound has been kept down by uncertainty around Brexit negotiations, while the US dollar has suffered from the North Korean crisis, recent hurricanes, and election promises that have failed to materialise.
It’s best to stay in close touch with a currency specialist, who can help you adjust your strategy to the current situation and advise on how to make the most of the strong euro or weak pound, without opening yourself up to unnecessary risk.
Jake Trask is FX research director at international payments company OFX, helping small businesses build currency strategies.
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