In this article, we’ve taken a closer look at the impact that currency fluctuations have had thus far – and are likely to have in the near future – upon the following industry sectors:
How will currency fluctuations affect manufacturing?
Thousands of businesses working in the sector have unique chains of import and export requirements that are all intricately interlinked. These chains also have strict final production deadlines that must be met in order to generate revenue and profit.
The manufacturing industry is highly susceptible to the impacts of foreign exchange volatility for a number of reasons. Because manufacturing entails long chains of exports and imports, even fairly minor adjustments to rates can make massive differences to projects operating at a global level.
Costs like foreign worker salaries, factory leasing and acquiring materials can all affect manufacturers’ cash flows if they are not carefully managed. Read on to learn more about current challenges and opportunities in Britain’s manufacturing sector.
Challenges for the UK manufacturing sector
Brexit and Covid-19 have created a number of significant challenges for the UK’s manufacturing industry. This sector already has to contend with disruptions to the supply chain, and the UK’s separation from the EU has only made matters more difficult. The latter half of 2021 has proven rather rocky for the sector; September 2021 saw something of a slowdown as a result of shortages in raw materials, labour and supply chain delays.
Manufacturers from all parts of the UK are currently having to assess their supply chains and ensure that they have adequate security with regard to essential components and critical imported materials. Companies are increasingly faced with the challenges of ensuring that their suppliers are holding the stock that they need and restructuring their intentions for employment, investment and growth amid unpredictable exchange rate changes.
Businesses that manufacture goods which are sold in other countries are especially exposed to the risks associated with exchange rate fluctuations. When the pound strengthens against other domestic currencies, manufacturers’ exports may become more expensive for consumers in foreign markets. And the profits that they make on export sales will fall when overseas profits are converted back to pounds.
Industries that purchase large quantities of components and raw materials overseas, such as the automotive industry, which buys 60% of its parts from abroad and assembles them in the UK, also run a high risk of being hit by currency value changes.
Alex Christou, co-founder of Eight Lands, an organic spirits producer from Scotland, faced a number of challenges in the wake of Brexit: 'A lot of our ingredients come from overseas; some of the best juniper comes from Eastern Europe, for example, and the citrus fruits that go into our gin are imported, too. We often buy from UK-based companies, so they would have been navigating the many supply chain challenges related to Brexit and Covid rather than us, but we have started seeing some issues in direct procurement of some botanicals in terms of the associated paperwork required to get things into the UK.'
Opportunities for the UK manufacturing sector
Despite the many challenges currently facing the UK manufacturing sector, there are abundant opportunities on offer as well. Companies looking to take advantage of these opportunities should use a hedging strategy to reduce the risk of financial impacts due to exchange rate fluctuations.
Forward contracts can be used to purchase a fixed amount of currency for a specific amount of GBP. This contract constitutes an agreement to buy or sell the currency at a pre-set price at a date set in the future, regardless of the exchange rate prices in the spot market.
This arrangement eliminates uncertainty for manufacturers, particularly when it comes to the amounts of foreign currency that must be paid for imports. By locking in an exchange rate, companies can give themselves more certainty over their costs and profit margins on each order they fulfil.
UK exporters stand to benefit from the recent fall in value of the pound Sterling against the US dollar. The drop in the exchange rate following Brexit has made UK manufacturing more price-competitive than ever before, while increasing manufacturers’ order book volumes considerably. While uncertainty is undesirable for any global currency, a weaker pound can increase UK exports and should lead to an overall boost in economic growth over time.
How will currency fluctuations affect shipping?
Global shipping lines face a number of significant challenges, such as market stagnation in the wake of Brexit and the outbreak of Covid-19.
This stagnation has led to a shipping crisis. Freight ships with growing load capacities and the merging of shipping line alliances have led to a decrease in container transport prices while the industry is under pressure to drastically reduce its carbon footprint. This has left many freight carriers struggling to cover their costs, increased fears of empty shelves in the lead up to Christmas, and paralysed key industries from construction to manufacturing.
Worldwide trade is conducted in US dollars, which makes long-term forecasting of exchange rate fluctuations challenging at best. This causes shipping line issues, affects the demand and supply forces in foreign exchange rates and drives away investors. The fuel shortages and supply chain crisis suffered by the UK in September 2021, for example, has led to serious concerns about the resilience of the British economy and resulted in the pound weakening against the US dollar. The pound fell below $1.35, an eight-month low, in September amid concerns amongst investors about the fuel crisis – a significant decrease from its value of above $1.42 in June.
Read on to learn about the risks affecting the shipping industry and how they can be successfully mitigated.
Threats affecting the shipping industry
Shipping companies have numerous expenses to foot, including the payment of crews, purchase of bunker fuel, maintenance work, port duties and more besides. All of these payments are made in a variety of currencies for international shippers, which naturally require conversion to the required local currencies.
As world trade and the bulk of international shipping business is conducted in USD, any fluctuations in USD can put substantial financial strain on shipping companies. For example, a European shipping company paying duties in USD during a time when the dollar has strengthened against the euro may face inflated expenses and reduced profit margins as a result.
Furthermore, fuel costs account for as much as 50-60% of a ship's operating expenses. This is impacted by the price of marine diesel and the types of sea freight rates that are used. Every ship ride’s profit margin is highly dependent on this price, so international freight forwarders are often forced to make short-term fleet line-up adjustments to compensate when fuel prices are high.
If diesel prices are high, many shipping lines will consider using smaller, ‘slow steaming’, energy-efficient freight ships instead of larger, faster models. However, due to the financial pressure and economic fluctuations caused by Covid-19, shipping companies no longer have the funds for these short-term investments. They therefore have no option but to take approaches that keep their profits and investment capital pools low, even when diesel prices are cheap.
Shortage of containers
A global shortage of shipping containers is driving up shipping costs and delaying the delivery of goods. Container prices surged by more than 700%, and the number of containers produced fell by 40% in the second quarter of 2020.
The pandemic and unequal international economic recovery are fuelling the crisis, which is forcing desperate shippers to wait weeks and pay premium rates for shipping containers.
These factors are all causing shipping costs to soar, and consumers are bearing the brunt of this in the form of higher costs. Another factor in all of this is the UK’s lorry driver shortage, which has resulted in it taking longer to move fully loaded containers away from ports and return empty containers for pick-up. As a consequence, Maersk, the world’s largest container-shipping company, decided to divert container ships away from Felixstowe, the UK’s main port, because it is 'rammed full of containers'.
This has significantly affected British businesses’ revenue streams and the way that they ship and sell imported goods. Some businesses have compensated by increasing their inventories in anticipation of future sales, whilst others have reduced their inventories considerably.
The influence of exchange rates on shipping
Many world currencies, including the USD, GBP and EUR, have fluctuated significantly since 2020. If, for example, the USD is strengthening against the EUR at a certain time, this would cause an increase in North American imports and a drop in exports.
It would also mean more air freight and sea freight at current ocean freight rates on North American lanes. For European shippers, having to pay freight duties in USD when the dollar is strong would eat away at their profits and drive up their expenses considerably. Conversely, as current ocean freight rates tend to be paid in US dollars, the weaker the USD is in relation to the country of import, the more affordable the import ocean freight rates become.
How might the risk posed by FX fluctuations be managed?
Shipping companies can manage the risks posed by exchange rate fluctuations by implementing effective currency risk management strategies. One of the most popular strategies is currency hedging, which can protect against losses that occur as the result of significant exchange rate changes after the time of import/export contract signing.
Forward contracts can be used to lock in exchange rates and purchases for a fixed period from the time of signing. Future contracts provide the option to purchase currency in the future at a locked price, preventing price unpredictability and helping to preserve shippers’ profits. Bear in mind that forwards can be booked for 2-3 years and may require a deposit.
How will currency fluctuations affect agriculture?
Interest rates affect the costs of investments, loans, and the values of prime farming land, among numerous other factors like import and export costs.
In this article, we explain how interest rates affect the agricultural finance system and the profitability of agricultural markets.
The effect of exchange rates on agriculture
How do exchange rates affect business for farmers? Agribusiness is an industry characterized by the practice of pre-ordering. As such, exchange rates impact agricultural sectors in a number of ways, altering the price of imported inputs, the prices of exports, and the competitiveness of the industry as a whole.
Farming is an industry that is particularly vulnerable to volatility in foreign exchange rates. Many large-scale agribusiness companies pre-order supplies, machinery and produce in advance, and the payments for these assets are often controlled by exchange rate volatility.
This can lead to farmers paying far more than they expected for these items – and passing these expenses on to consumers or shouldering the financial pressure themselves.
Agricultural production and FX
A large percentage of farm inputs, such as machinery, equipment and chemicals, are imported as well, and exchange rates will dictate those costs. A rise in the value of a local currency will decrease the costs of these imported inputs, thereby increasing agribusiness’s output volumes.
Exchange rate fluctuations can affect the competitiveness and value of local exports in international markets as well. An increase in the value of a local currency can influence the agricultural industry by making local products more expensive for importers unless farmers are willing to accept lower prices for their produce.
Farmers’ products can also become more expensive in non-domestic markets if the costs of importing equipment and exporting produce are inflated, which leads to reduced demand and forces farmers to lower their sale prices.
A decrease in the value of local currency will force producers to become more competitive and increase the volume of exports. From a long-term angle, exchange rate fluctuations alter the investment and production of agriculture sectors, which can directly affect the food and agribusiness industry’s efficiency and productivity levels.
Brexit and Covid-19 have also disrupted agricultural supply and demand patterns in complicated ways. Most countries have exempted food and agribusiness companies from lockdowns and movement restrictions, but these companies are still being forced to rapidly diversify and amend their supply chains to restructure the way they supply their produce. Brexit has also reduced the available workforce and increased the amount of red tape involved in exporting produce.
This has culminated, most recently, in reports of food supply shortages in the UK – shortages that may, according to Ian Wright, the boss of the Food and Drink Federation (FDF), become a permanent feature of day-to-day life. The biggest supermarket chains, such as Sainsbury’s, Tesco, Morrisons and Iceland, have been affected by serious supply chain issues and labour shortages. The government has introduced a raft of measures to tackle the shortage of HGV drivers and make it easier for people to secure driving licenses. Mr Wright also said that the UK supply chain was short of half a million staff, or 12.5% of the total staff in the industry.
The closures of hotels, restaurants and catering due to the pandemic has shifted demand for food products to supermarkets, and many companies have had to switch production lines and expand their capacities to manage larger inventories. Others have had to hire temporary staff, move online, and deliver direct to households in order to maintain their operations.
Managing currency fluctuations in the farming industry
Currency markets are notoriously volatile, and managing currency fluctuation in the farming industry is essential to hedge your risks and preserve your profit margins. Many agribusinesses use banks to make overseas payments, while others use foreign exchange experts to obtain better rates and monitor markets to ensure they have the best chances of buying foreign currencies at the right times.
The concept of hedging currency risks is fairly straightforward. Agricultural businesses can use deposits to set up forward contracts, which allow them to lock in an exchange rate for a specified period of up to two years.
There are also more flexible options, such as market orders, available. Market orders enable agribusinesses to specify target rates, and if those rates are reached, the funds are automatically transferred.
The market order approach does not offer any guarantees, but can be combined with a stop-loss order that specifies the lowest limit a farmer is willing to accept. This allows agribusinesses to protect their bottom lines while still taking advantage of favourable currency fluctuations in the market.
How will currency fluctuations affect fashion & textiles?
Luxury fashion brands can be particularly affected by currency fluctuations. This is to be expected, given that such brands earn revenues and incur costs in a number of different world currencies.
When Switzerland liberated the Swiss franc from the euro’s value in 2015, luxury watchmaker Swatch immediately shouldered a 15% rise in expenses while its shares dropped by a comparable degree. Richemont, another luxury Swiss brand and the parent company of Cartier, lost 14% in market capitalisation due to the market’s volatility at the time.
It is worth noting, however, that recent developments have helped breathe new life into the world of high-end fashion. The COVID outbreak had a significant impact on Next and the womenswear retailer In The Style, which were severely hit by supply chain issues and higher freight costs in mid-2021. While luxury fashion chains have not been as profoundly affected, they are by no means immune to these changes and have started to embrace eCommerce and direct-to-consumer sales methods. It’s no surprise that eCommerce is expected to account for 30% of the luxury goods market by 2025.
How does exchange rate volatility affect luxury brands?
Luxury fashion brands will adjust their pricing strategies rapidly to stay ahead of exchange rate volatility. When the pound fell by 18% against the US dollar following Brexit, luxury brands responded in a way that increased headline prices in the UK by 5% by replacing their existing inventory with higher priced products.
Unlike other fashion companies, luxury fashion producers often do not have the option of moving their production operations in response to changes in exchange rates. Many brands are closely linked to their locations; for example, Swiss luxury watches must be made in Switzerland to retain their appeal. Luxury brands also earn revenues and generate costs in many different countries, which exposes them and their profit margins to shifts global foreign exchange rates.
Exchange rate fluctuations can also affect brands’ sales in a direct way. If, for example, the US dollar begins to perform weaker against the euro and the pound, the cost of importing products to America will increase. This will lead to a rise in the cost of luxury goods locally, which could push them out of reach of customers who would otherwise have been willing to pay for premium products.
When the exchange rate of the euro fell against the US dollar in 2015, European luxury brands whose costs were largely denominated in Euros saw significant declines in their production costs. At the same time, American shoppers paid less for their products, both locally and in Europe due to the strength of their home currency. American luxury jewellery company Tiffany and Co. missed financial projections due to lower overseas sales and fewer purchases in its US stores.
The impact of foreign exchange on global supply chains
Foreign exchange rate volatility can also have significant impacts on international supply chains. Exchange rates drive sourcing decisions along with a number of related and indirect factors, including the revision or elimination of trade agreements, security and geopolitical risks, the availability of workers, technology transfers, and growing social responsibility expectations from consumers.
All of these factors can be extrinsically tied to currency fluctuation and may expand their impacts. For example, geopolitical instability often lowers local currency exchange rates, and other factors may even outweigh shifts in currency.
Additionally, exchange rate fluctuations can increase the prices of the global currency clothing materials, components and textiles from foreign suppliers as a consequence of unfavourable foreign exchange rate shifts. This puts significant pressure on fashion companies’ pricing and sourcing strategies, which in turn generates more strategic and operational risk.
Brexit and the Covid-19 pandemic have also put strain on fashion brands’ supply chains, forcing disruption and diversification across the industry. The regulatory uncertainty leading up to Brexit caused delays in operational progress, and later, Covid-19 led to factory closures, entire supply chain disruptions, and product shortages. Many fashion brands chose to focus on eCommerce and direct-to-consumer sales methods to make up for their losses caused by widespread retail store shut-downs.
According to Ian Holdcroft, co-founder of Shackleton, consumer habits have undergone a fundamental shift in the wake of the Coronavirus pandemic: ‘Now, 12 months on, consumers are so used to shopping online and courier services are so much better. Now you can get the whole works: purchase, deliver to your door, try it on, either keep it or send it back, and all within a matter of 24 hours. It has totally changed consumption habits and luxury brands have totally understood how to transition the luxury experience into an eCommerce-based environment.’
NFTs in the fashion industry
Non-fungible tokens could play a major role in the future of fashion. NFTs create digital fashion that can be authenticated and traded securely on the blockchain. This technology allows luxury fashion consumers to purchase and maintain sole, exclusive digital ownership of items on the web, while allowing brands to compete and innovate in sustainable ways. Blockchain is also revolutionising the way big brands conduct business, particularly when it comes to adopting circular business models. NFTs provide the ability to trace design rights and ownership, which can fairly credit designers and creators.
Their technology also facilitates secure cryptocurrency transactions that would essentially see online purchases of luxury goods becoming crypto investments in their own right. Furthermore, they also enable brands to effectively re-target customers to preserve their profit margins and hedge their risks against ongoing exchange rate volatility in the long term.
How will currency fluctuations affect travel?
Currency exchange rates are influenced by a number of complex, technical factors. These exchange-rate factors, which include supply and demand, economic performance, inflation and rate differentials, are in a constant state of flux.
Businesses in the travel sector are directly impacted by currency fluctuations for several key reasons. The relative strength or weakness of a local currency compared to other major currencies can dictate the traffic and expenditure of customers in the travel sector.
How do exchange rates affect tourism?
Tourist exchange rates have long been regarded as having a significant impact on whether people choose to travel abroad. More people travel for leisure than they do for business, and the rates at which people choose to travel, just like any other leisure activity, fluctuates according to factors like economic prosperity. The role that exchange rates play in travel choices has also been increased by the Covid-19 pandemic, which has caused a significant global economic downturn and led to the imposition of strict travel restrictions.
The pandemic has given rise to new trends in domestic travel, including local tourism, shorter ‘minications’ and local ‘staycations’ with flexible cancellation policies. According to Booking.com, people are now less likely to travel further from their homes, instead preferring to explore closer, low-risk areas instead. Travellers are also prioritising travel destinations and services with low Covid-19 infection rates and excellent hygiene protocols in place. They are seeking out digitised activities at a higher rate, too.
Interestingly, many travel trends are heavily influenced by the media. Travel media outlets establish trends based on professional research media like tourism surveys. They use these opinions and data, which is influenced by currency fluctuations, to develop promotional campaigns for certain travel destinations.
As a consequence of these trends, travel and tourism businesses handle large volumes of travellers heading to whichever regions are currently in vogue. Over time, these trends are influenced by the state of the global economy and will change according to the currencies that are performing strongly or weakly.
For example, when the pound strengthens against the US dollar, British travellers may flock to the USA or Hawaii to enjoy more cost-effective holidays with their stronger home currency in hand.
How does currency appreciation and depreciation affect travel tourism?
Travel tourism is affected in many ways whenever a currency appreciates and depreciates. Exchange rate appreciation and depreciation can play a major role in directing travel movements by encouraging travel to specific destinations. They can also spur a higher level of domestic tourism.
The impacts of exchange rate appreciation on tourism
How do exchange rates fuel the travel industry? Travellers to foreign countries need to convert their money to their chosen location’s currency in order to pay for restaurants, museums, hotels, shuttles, and other essential services. When a tourist’s home currency has appreciated in value against major world currencies, they will be more likely to travel, as the exchange rate will work in their favour when it comes to exchanging currencies.
Tourism and travel firms will also enjoy more business during times of currency appreciation. Travellers can take advantage of the strong currency to visit exotic destinations, allowing their travel agents to earn more commission in the process. However, countries whose currencies have strengthened may see fewer foreign travellers entering their own borders, due to increased travel costs and their money not going as far as usual.
The impacts of exchange rate depreciation on tourism
The depreciation of a nation’s tourist exchange rates will lead to fewer locals venturing abroad. If, say, the GBP drops in value for a significant amount of time, travellers who venture to foreign nations for leisure or business will have to pay more in those countries.
The depreciation of a local currency means that travel businesses in that area will experience a marked shift in travel trends. Travellers may seek out locations where they will receive better value for money, such as Africa or Southeast Asia, as opposed to Europe and the US. Many others will turn to domestic tourism and travel their own countries instead, as foreign currency appreciation encourages local tourism.
It is also common to see increased numbers of people visiting countries at times when their currencies have depreciated in value. Visiting nations with weaker currencies gives tourists favourable spending power and brings much-needed tourism capital into those countries. This can help strengthen their economies in the long run.