How to take control of currency at a time of financial uncertainty
When the first cases of COVID-19 emerged in December, no one could have anticipated the sheer speed and scale with which it would spread, shutting down international travel systems, forcing schools and cities to close, and sending entire economies into free-fall, together with foreign exchange markets.
While the actual social and economic impact of the virus is still unknown, it is already clear that small and medium-sized businesses face particular pressure. For SMEs trading internationally, currency volatility has only added to the problem.
The uncertainty and pace of the outbreak, and the global response to it, has caused intense volatility in the pound, sending it crashing down to lows not seen since 1985.
Despite efforts from the UK government to stabilise the economy, the situation is still volatile, and we could continue to see currency swings for months to come.
And it’s not just the pound that is in turmoil. The Euro has also suffered mercifully at the hands of the US dollar which is typically seen by investors as a safe haven currency and a sure-fire place to park investments in times of uncertainty.
Meanwhile, the Australian dollar, and other commodity currencies that we closely monitor for our clients, has also taken a hit because of its close economic ties to China, dropping to a 13-year low against its US counterpart. No currency is unaffected.
For any company trading overseas, currency shocks can have a serious effect, hitting everything from the price of imported goods and materials to profit margins on international sales.
In the last week, Ive spoken to SME clients in tens of sectors, concerned about how to relieve the pressure that foreign exchange is putting on their bottom line. However, the good news is that although these are unprecedented times, there are still ways you can safeguard your business from the unexpected:
1. Lock in exchange rates
A straightforward currency plan is one of the best ways to find some certainty in an uncertain world. Even if you’ve never had one and have felt the impact of recent volatility, it’s still possible to limit the effect that future currency shocks can have on your business.
A strong currency plan can help you take control of costs, limit your exposure to currency risk, and get clarity on exchange rates for upcoming international transactions.
Working with a currency expert to develop a specialised currency strategy will ensure you’re taking the measures that are best for your business. A forward contract, for example, lets you lock in today’s exchange rates for a fixed period, making it easier to plan ahead and know that if the pound does continue to fall youll be protected from the impact.
At OFX I work with businesses every day to use this approach to protect revenue and now, in a period of intense volatility, forward contracts are more valuable than ever.
As Senior Currency Strategist at OFX, Hamish works with hundreds of businesses of all sizes to limit their currency exposure. He provides regular commentary and analysis on the latest movements in the pound and also frequently participates in live broadcast interviews around key economic events, most recently seen on BBC, Bloomberg and Reuters TV.