There have been significant challenges to global trade over the last year, not least the ramifications of Brexit and the US-China trade war. In addition to practical and political barriers to trade, currency cost and risk due to fluctuations in the foreign exchange market are a constant challenge which means that businesses may benefit from integrating a currency strategy into the overall business plan.
Counting the cost of global trade
Whether importing or exporting, there are a range of costs which companies may incur when trading with companies overseas. Importers of goods and components will have costs in currency from overseas suppliers, exporters will have costs across the supply and distribution chain. Many UK high street banks charge fees for currency transactions, which could eat into profit margins. In addition, there is a time and resource cost, particularly when dealing with multiple currencies, to manage all the payments and receipts in various currencies.
Understanding currency risk
In addition to these costs, it can be difficult to produce accurate budget projections because the value of the pound fluctuates in the currency market. If the pound weakens, this increases the cost of imports. For exporters, it can offer new opportunities because it offers great value in overseas markets.
However, because currency markets aren’t fixed and move constantly, this can’t be relied upon. Political changes, economic results and the performance of other currencies all impact the value of the pound and the complex interplay of factors make the market difficult to predict, which creates currency risk.
It’s possible to calculate the measure of risk by exploring a company’s currency exposure – the fraction of revenue and costs which are in currency. In general, the larger the proportion, the greater the risk but the exact currencies and their volatility may also be taken into account. Once this has been established, a suitable currency strategy can be developed which addresses this risk.
The impact of currency costs and risk
There are broad-ranging implications for importers and exporters of both currency costs and risk. One of the key issues is that it puts pressure on prices, and in turn on profit margins. In a fast-moving and competitive environment, businesses can find themselves priced out of the market or selling at a loss due to fluctuations in the value of the pound.
Administrative costs and service fees also erode margins. Complexities regarding payments to other countries can also cause friction with suppliers, distributors and customers, which is an additional challenge and could impact longer term, strategic plans.
Currency concerns for importers
The primary concern for importers, whether of goods or components for manufacture, is the cost of supply. A weaker pound since the EU referendum has been a challenge to some importers as it has driven up the real cost of goods. In some industries, such as the toy industry, it’s important to keep up with trends which means that some importers can feel at the mercy of the currency market in order to meet market demand. Other companies with ethical concerns seek to address the challenge of balancing costs and opportunities across the supply chain and over borders with additional priorities including limiting the carbon footprint of the product.
The exact nature of the import strategy will depend on both the industry and the business, but what is clear is that currency costs play a significant role in the acquisition of goods from overseas. A currency strategy can be developed which means strategic and commercial objectives and addresses the exact nature of the currency risk.
British exporters make hay with the weak pound
While the weaker pound has been a challenge for importers, it presents an opportunity to British exporters because it offers overseas buyers excellent value for money. The UK exports a broad range of goods and services and like importers, the range of challenges relating to currency varies depending on the location of the overseas markets and the exact nature of the business. While the currency market currently works in exporters’ favour, this can never be guaranteed.
A resolution to Brexit, a change in the trajectory of the US-China trade war, or a dramatic change in the value of another currency could all impact the value of the pound. If exporters have relied on the pound remaining weak, they will have to choose between increasing prices or accepting eroded margins if the pound makes gains in the future.
Industries such as manufacturing, where exports play a major role in business growth, may use a range of currency tools to create a balanced currency strategy which allows companies to take advantage of the current opportunity of a weaker pound whilst also hedging against the risk that the pound could make gains in the future.
International partnership and innovation
While costs and revenue comprise the bulk of a company’s currency exposure, the changing nature of many industries means that supply chains are becoming more complex, competition is becoming fiercer and more international partnerships are being formed to foster innovation. Rapid transformation in agriculture to address a wide range of issues including climate change has increased the number of partnerships, consultancies and support services across the world.
Indeed, within the food and drink industry, this applies not only to imports and exports but also across the supply chain and every aspect of the business, from packaging to point of sale. Even modern industries such as air travel are turning to partnerships and mergers to keep pace with the rate of change. The end result is that a company’s currency exposure can be more complex than simple incomings and outgoings in different currencies, and this again adds to the nature of a company’s exposure to risk.
Helping UK importers and exporters address currency risk
Our corporate team provides guidance and support to UK businesses seeking to hedge their currency risk. From greater price certainty for imports and exports to facilitating long term partnerships and even improving administrative efficiencies, our range of corporate FX solutions and services supports businesses with an international outlook.
Our global payments platform helps businesses manage their currency costs and the team can offer expert guidance on methods of understanding and managing currency risk as well as access to a range of specialist tools to help protect the bottom line. From understanding your company’s currency exposure to streamlining your payments, our team of foreign currency exchange experts can help businesses deliver on their global ambitions.