How a currency hedging strategy can…

Currency markets are volatile at the best of times, as exchange rates fluctuate under the influence of a constant stream of political and economic variables. Unfortunately, Brexit has triggered a particularly turbulent period for the pound, with the uncertainty surrounding the UK’s departure from the EU showing no sign of abating. This has bought the importance of managing currency-related risk into sharp focus for businesses that operate across international borders.

The problem for businesses with exposure to currency risk is it’s difficult to predict how Brexit will impact the pound next – especially without a working knowledge of market movements. So, with uncertainty – from the prospect of a no deal to the prospect of another election – holding so much sway over the cost of their international payments, the most prudent course of action is to implement a Brexit hedging strategy; one that enables them to plan ahead effectively.

Brexit uncertainty

Adopting a reactive, hope for the best approach to your currency strategy will leave your business’s finances at the mercy of Brexit-fuelled uncertainty. You will be left powerless as you cross your fingers and hope the spot market – the rate of a foreign exchange contract for immediate delivery – moves in your favour.

Uncertainty has weighed heavily on the pound since the British public voted to leave the EU back in June 2016. During the intervening weeks, months and years things have gone from bad to worse for the currency, which has fallen to multi-year lows against the US dollar and euro. Three Prime Ministers, one general election, four rejected deals, two deadlines and a Conservative Party leadership contest later – not to mention the ensuing economic uncertainty – and the Brexit scenario is as confusing as ever.

Most recently, attention has focused on the determination of 10 Downing Street’s latest resident to make Brexit happen on 31st October – deal or no deal. Prime Minister Boris Johnson’s efforts to deliver Brexit by the current deadline even saw him attempt to suspend Parliament for five weeks; a move that proved unlawful, after Supreme Court judges ruled it was wrong to stop MPs carrying out duties in the run-up to the deadline.

A law designed to stop a no deal Brexit on 31st October was subsequently passed. Therefore, if a deal is not reached between the UK and EU by 19th October, and MPs don’t vote in favour of leaving with no deal, then Mr Johnson will be legally obliged to ask the EU for a further delay to Brexit.

So, with the government’s revised proposal on the table – one the European Commission believes contains “advances” but said problems remained – and the Brexit saga still far from resolved, what about the pound?

The ongoing drama continues to leave sterling with a sinking feeling. So much so that it sunk to a 10-year low against the euro in August (€1.06) and a 34-year low ($1.19) against the US dollar in September – bad news for businesses importing goods or services to these shores from the Eurozone or US, as the cost of doing so rises.

With a withdrawal agreement far from guaranteed, the potential for yet more Brexit-related currency market volatility is, unsurprisingly, very much on the cards. Scenarios that could trigger yet more uncertainty for the pound include:

  • If a new deal isn’t agreed and Mr Johnson refuses to seek an extension, a legal battle is likely.
  • If Mr Johnson does request an extension, there is no guarantee the remaining 27 EU members would agree – leaving without a deal would mean the UK exits the customs union and single market immediately, jeopardising trade relations.
  • An early election is widely expected after 31st October, with the Liberal Democrats even promising to revoke Brexit without a referendum if they win.
  • Even if a deal is agreed and the UK Brexits on 31st October, the pound’s fortunes will be dictated by the strength of the government’s negotiations around issues such as trade.

Brexit hedging strategy

Adopting a proactive, forward-thinking approach to your currency strategy is, therefore, essential during a prolonged period of political and economic turmoil – none more so than Brexit! Unfortunately, extreme exchange rate volatility often leaves businesses unsure of how to proceed.

Should you hedge your currency and risk missing out on favourable market movements after Brexit – if it ever happens? Or should you throw caution to the wind and risk falling foul of unfavourable market movements because you haven’t hedged enough? Both scenarios could increase the cost of goods and services and make it more expensive to change foreign revenue back into sterling.

There’s no “one size fits all” solution to guarding profit margins against currency market volatility. Therefore, you should devise a bespoke hedging strategy that fits your business’s unique needs.

Get help from the experts

For expert guidance around planning, implementing and managing a currency hedging strategy that helps your business beat Brexit, talk to a currency specialist. RationalFX offers an award-winning service that is convenient, cost-effective and secure.

You will be assigned an account manager who will take the time to understand your business’s objectives and appetite for risk, before helping you establish an effective hedging strategy. This dedicated expert will monitor the driving forces behind currency markets movements on your behalf, allowing you to make informed decisions around the timing of your international payments – and your wider hedging strategy. Relieved of this laborious and often confusing aspect of currency risk management, you can rest assured that you have access to relevant information that will help you mitigate risk.

They will also explain the tools that can be used to hedge your currency risk – from technical options to more simple resources like a Forward Contract: this allows you to secure a rate today for a transfer that happens up to two years in the future. Having entered into a contract with a supplier overseas, you will know exactly what your revenue or costs will be, regardless of future market movements. What’s more, rather than adopting an all-or-nothing approach, you might leave room to capitalise on favourable market movements by only hedging a portion of your foreign exchange exposure using forward contracts.

Successful cross-border businesses are proactive when it comes to managing their exposure to currency market risk – particularly at times of heightened volatility such as this. They don’t sit back, and hope Brexit-fuelled exchange rate fluctuations go in their favour; they plan ahead with help from the experts.

If you’d like more information about our hedging strategy product or further details about managing your FX risk during and post-Brexit, email us at brexit@rationalFX.com, or sign up to create an account with us.

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