Posted: Thu 12th Sep 2019
With the uncertainty around a No Deal Brexit, general election or extension the pound has been suffering. As of this week the UK's currency has fallen to its lowest level since a flash crash in 2016. The previous barrier between a hard Brexit vs soft Brexit was GBP/USD 1.30 but this is now a million miles away and now the new barrier between a general election and extension seems to be 1.20.
The issue is that the UK imports more than it exports. Indeed the UK currently runs a trade deficit of £31 billion meaning that in general sterling weakness is bad news of the UK economy with the net effect being upwards pressure on prices.
Firstly, speak to a currency expert or your bank. The worst thing to do is not take the advice of the experts on offer. Second, figure out your budget rates for foreign currency, particularly if you import you're goods from overseas and crucially forecast how much foreign currency you may be exposed to or have to purchase over the next 3, 6, 9, 12 months.
Your budget rates should include the rates that make you competitive, the rates that keep the business economical and the worst case scenario rates. Thirdly and finally put a plan in place. Don't sit idly and let Brexit pass you by affecting your business.
One approach and plan is to look to remove risk that the volatile currency markets present by hedging a portion of your business' foreign currency exposure. Obviously this is one of the steps to take after your budgeted levels are calculated and as a business you know how much foreign currency you may have to buy or sell.
Forward contracts allow you to hedge a portion of this exposure and fix the rates of exchange for up to 24 months. The benefit is that you know exactly what rate of exchange you will be buying or selling your foreign currency at and you are not at the perils of Brexit volatility.
Crucially though and one tip is to not lock in all of your expected exposure at a single rate of exchange through a forward contract. We would recommend to clients, depending on their circumstances, that they forward buy 50% - 75% of their expected exposure.
The reason and advantage is that if the currency continues to move in your favour as a business you can still look to take advantage of this by purchasing on the spot market as well. Don't put all your eggs in one basket.
Brexit has been affecting businesses and business appetite since the referendum in 2016 and the foreign currency market and the price of sterling has been one of the key and most significant bi-products of the result. Importantly though, businesses need to remember that they are not alone in their exposure to the FX market and there are a number international payment companies on hand to assist.
_Hamish Muress is currency analyst at OFX.
Stay up-to-date with the latest Brexit guidance for businesses with the Enterprise Nation Brexit Advice Service._