At the time I started writing this article, the UK was set to be fully ‘unlocked’ over the next few weeks. With recent developments, this goal is looking less secure and, as a result, the ideas in this piece are only made more poignant. Business owners, economists and remote workers are waiting with bated breath, as we return to normal. What does this mean for foreign exchange and, more importantly, how does this affect your business?
The Bank of England’s (BOE) target inflation rate plunged from 2% to 0.7% in the past year. It makes sense, then, that the two years of little to no economic growth is forced to recoup. The lower the interest rate, the less motivation there is to keep money in the bank, so you know what 0.1% means: time to go shopping! Quantitative easing – another tool to adjust inflation – is also being kept at a stable level by the BoE. The bank reported that the ‘amount of quantitative easing [will be kept] at £895 billion.’
Further push for growth has finally shown physical results. It has been widely argued that the UK’s ability to strike its own trade deals is one of the big benefits of Brexit. If you want more spending, giving the public access to cheaper food and the opportunity for wider Asia Pacific trade is certainly a start. I am, of course, referring to the proposed Anglo-Australian trade deal, in the pipeline.
The BoE predict that inflation will return to 2% later this year, planning seems less theoretical and there is an international opportunity on the horizon. These could prove to be exciting times to be a British business owner. These changes are, too, reflected in the currency markets. How does Sterling directly compare to other currencies for international trade? If one thing is for certain, when you know more about one side of your currency exposure it is easier to decide on what to do. It is at this point that my accounting and finance lecturer’s voice pops into my head ‘cash flows need to be a smooth line!’ Well, they certainly might be now. Hedging with forward contracts are easier with forecasting clarity, and limit orders can be a useful tool when you have the ability to set a target rate in the market and hope for it to hit.
Sounds ideal right? The country is moving forward, economies are on the rise, summer is coming, and you can sit inside at the pub! If we were watching a movie, it would be at this point that I would turn to my friends and say ‘something really bad is about to happen’ as we all hide behind the cushions…
As Jeremy Boulton, a Reuters market analyst forecasts Sterling to hit 1.5 against the dollar, we need to ask ourselves whether the UK recovery is factored into the market and if the general sentiment is ‘the UK is in the clear!’ If so, should we be worried? It could be argued that the only thing that we know for certain is that nobody knows what will happen. Predicting what will happen tomorrow, from what has happened yesterday is treacherous. Like a tight-rope walker, one slip-up and the only way is down.
Post-Brexit trade deals provide opportunity but if someone showed up at your business, and offered you an opportunity to solve all your problems, would you buy it? Opportunity comes with risk and the exposure to larger numbers of countries, to a higher extent, can be difficult to manage. Similarly, on the interest rate front, there is an elephant in the room. Keep interest rates low, encourage spending and recoup economic growth. High inflation means higher prices and higher prices mean that people get paid more, but, from where?
Unemployment spiked from 4% to 5.1% during the pandemic. Coronavirus Job Retention Scheme (CJRS) considered; do you think unemployment is likely to increase at the end of September? The government has kept the British economy on stabilisers and now we are donning our helmet and hitting the ground running for the first time in fourteen months.
There are conflicting opinions and, as businesspeople, we need to consider every eventuality. Who to believe? Who to trust? The onus is on you. All the change over the past year, or so, has led to business owners putting out fires and being reactive rather than proactive.
When it comes to foreign currency strategy, it is very rarely at the forefront of a CFO or CEO’s mind. You will fall into one of two categories: foreign currency trade is a headache or an opportunity. It is important to understand in which camp you reside.
- Foreign exchange headache: think about the facilities and tools that your provider can offer you. With the help of your provider, forward contracts, credit facilities and strategy can all be used to allow your foreign currency exposure to run itself.
- Foreign exchange opportunity: is the same system you used through the UK’s largest economic slump in three hundred years still a good option? Tailored solutions can maximise security whilst allowing you to capitalise on market volatility.
The currency requirements that you have now may, also, be different, whether that be in total exposure or currency variations. Is this likely to be permanent? Is this going to increase or decrease? Is it even viable moving forward? Different currencies and different amounts mean different levels of volatility. As vaccinations in different nations occur at varying rates, the habit of looking internally may reveal another major turning point to a lot of business models. Can you avoid currency trades altogether? Markets opening at different rates may reveal that you must pay the same amount as you receive, in a certain currency. Equally, this may not be the case anymore.
Unfortunately, this isn’t just dependent on your business. Whether you have fixed costing on your consumer side can affect your budgeted rate and, despite fixed costing, changing your price may affect your market position. It is important to situate yourself in your wider supply/value chain, in this respect. You are a consumer as well as a producer, and all this affects your cash flow. Use your foreign exchange provider, as part of your value-chain, to do exactly that: add value. In this vein, while we are in a pandemic, working capital in your supply chain may be the most delicate part of your business; if this is something you can increase, why wouldn’t you make the most of it? Maintaining a large amount of liquidity shouldn’t have to restrict your foreign exchange capabilities, so ask where your provider can help. Consider credit, simply reducing the amount of the deposit you pay, to protect against adverse market moves.
To discuss this article or to discuss your FX requirements, email me: [email protected]
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This blog post is intended to provide you with information on the services Infinity International Limited (IIFX) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. IIFX is a company registered in England with registered number 06333730 and registered address at Building One, Chalfont Park, Gerrard’s Cross, Buckinghamshire, SL9 0BG. IIFX is authorised by the Financial Conduct Authority under the Payment Service Regulations 2017 (FRN: 567835) for the provision of payment services. IIFX is authorised and regulated by the Financial Conduct Authority in the conduct of designated investment business (FRN: 671108).