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, I’ve 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 – you’ll 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.
2. Get on top of your supply chain
Global supply chains are likely to see a huge reshuffle in the coming weeks and months as businesses adjust to the disruption caused by the near-total shutdown of countries including China, which it is estimated as many as 81% of businesses worldwide rely on as a supplier.
It’s worth looking now at which products you could source from within the UK to help minimise disruption to your supply. Of course, sourcing locally is not always possible. For produce and parts imported from overseas, ask your payments provider about setting up a Global Currency Account.
This lets users hold balances in multiple currencies and make payments to global suppliers in their local denomination, reducing the need to move your money from one currency to another, where it could be exposed to uncertain exchange rates.
3. Keep an eye on the markets
With everything changing so quickly, it can be difficult to stay on top of the news and what it means for exchange rates and your business. What’s more, it can easily feel like your attention is being pulled in too many directions at a time when real focus is needed.
Work with existing partners wherever you can, drawing on their expertise so you can channel your own attention onto core business decisions.
For example, subscribing to daily market commentary from your currency partner will ensure the exchange rate information you’re getting is accurate, focused and actionable – something that’s particularly important at a time when trusted resources of information can be hard to find.
Finally, pick up the phone. My team and I have been busy supporting businesses around the clock during this confusing time. It’s always worth speaking to an expert about the options available to your company, as the best currency plan is one that is tailored to you. Although a lot is still unclear, acting definitively now will help you create some financial certainty in a period of great unknowns.
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