How exporters can mitigate against volatile currency markets

This article looks at how small and medium-sized businesses can take the edge off their exposure to volatile markets against the backdrop of renewed European uncertainty.

For many British exporters, currency volatility is a big concern. A sudden shift in exchange rates, and a profitable deal can all of a sudden lose value, or in an extreme case, turn into a loss-maker.  The financial troubles in Europe, for example, have caused much grief and worry.  One of the major concerns our customers were facing during the first half of 2012 was the mounting threat of Greece’s potential exit of the euro; a ‘Grexit’.  Although these fears have subsided somewhat, the overall climate of economic uncertainty and market volatility remain.

Over the last few months media and market attention has continued to focus on Europe’s financial difficulties. UK-based exporters need to insulate themselves as much as possible from the adverse effects of the debt crisis.

So, the question is: what can businesses do to mitigate against all this uncertainty?

Quite simply, and as has been the case following several years of economic instability, small and medium-sized enterprises need to be financially-savvy. With such uncertainty in Europe, businesses need to remain in a position where they can continue trading internationally whilst not putting their own livelihoods at risk.

A lot of solutions exist to help businesses protect against market volatility, at least in the area of foreign currency payments.   We work very hard with exporters to analyse and understand their businesses and what their foreign exchange needs are so together we can craft a solution tailored to fit those needs.  Examples of what some of our clients consider include:

Forward contracts/FX hedging

The pound has steadily strengthened against the euro in the first half of 2012, ranging from a low of €1.18 (24 Feb) to a high of €1.29 (24 July)[1]. News of a weakened euro has helped some of our customers, particularly those importing from the eurozone. SMEs buying in euros could consider making a forward or future payment. This enables businesses to lock in international payments at a fixed exchange rate, so as to manage their costs and avoid being subjected to the summer’s volatile currency fluctuations. By fixing the exchange rates of their international payments, businesses will be in a better position to manage their outgoings, and will therefore be better equipped to cope with unforeseeable market disruption and other external variables. In these times of volatility, businesses should look to control as much of their financial transactions as possible; fixing the exchange rate eliminates a business’s exposure to FX volatility.

SEPA and direct payments

The Single Euro Payments Area (SEPA) was the payments integration initiative of the EU, designed to simplify bank transfers. The reality of SEPA has been somewhat marred by missed deadlines and delayed legislation, to the extent that there is still a lot of inefficiency when one eurozone country makes a cross-border payment to another eurozone country. By contrast, businesses based in the UK are able to make direct payments in the currency of their choice, at their chosen fixed rate.

The clarity and efficiency that stems from fewer bureaucratic hurdles is a luxury that UK exporters should not take for granted.

Alternative markets

Another tactic that could help UK businesses to minimise the impact of the eurozone crisis is to consider additional or alternative markets when trading internationally. Increasing exposure to the emerging market success stories, such as Brazil and China, would potentially benefit UK SMEs in the medium to long term. Indeed, one of the more significant announcements for international trade was made at the start of the year, when the UK Treasury confirmed the development of London as the leading international hub for trading China’s currency, the renminbi.

Treasury officials are confident that the new partnership puts London in a strong position to be a major centre for trading the Chinese currency outside China and Hong Kong; they have forecasted that trade transactions settled in the Chinese currency would reach around a trillion dollars (£650bn) by 2020[2]. The Government’s aim is for London to complement Hong Kong in becoming a major offshore centre for the renminbi[3].

This move has the potential to change the landscape of international payments and will catapult UK SMEs into more global markets. In essence, it will make it easier for UK businesses to benefit from China’s growth. China’s economy grew by 9.2% in 2011 and has predicted a 2012 growth rate of 7.7%[4]. By comparison, the eurozone grew by just 0.1% in 2011 and is predicted to contract by 0.3% in 2012[5].

It all boils down to preparedness. In short, what are the exposures your business is open to and what are the solutions out there that can help minimize that exposure? Talking to a specialist can help as the above are just examples of what British exporters can consider when they’re looking to minimise the impact of the European financial crisis on their business.

This article has been prepared solely for informational purposes and does not purport to provide any financial, investment or professional advice. It does not in any way create binding obligations on Travelex Global Business Payments Limited, a Western Union Company. Travelex Global Business Payments Limited makes no representation, warranty or condition of any kind, expressed or implied, in this article