For businesses trading with Europe, the threat of Brexit is looming. For some, leaving the EU could bring a wealth of benefits, and for others it could have a deeply negative impact on their trade.
Any companies that are dealing with currency, however, need to be aware of the uncertainty in the markets at the moment. We’ve already started seeing how anti-EU rhetoric can damage the pound, with the GBP/EUR exchange rate recently reaching lows last seen in 2014.
Whether or not the UK leaves the EU, the process will seriously affect the pound – even this early on in the debate, sterling has already experienced some significant dips. The currency markets are predicted to be erratic right up until the referendum, so it’s important for any business to consider their currency exposure, and ensure that their bottom line is protected now.
Here are some tips on how best to protect your business from currency volatility, due to Brexit, over the next few months:
– Shop around for the best rate: Doing your research will pay off – don’t just rely on your bank, which will often quote you a poor rate and hit you with transfer fees in the region of £20. Get a few quotes from FCA-regulated foreign exchange companies and see who gives you the best deal. Do ask about pricing transparency, though, as some may entice you in with competitive rates and then hike their prices later on.
– Lock in good rates now: Using a forward contract allows you to secure today’s rate, and then complete the transaction in the future. This protects you against sudden dips in the market, and will prevent you losing out to any further fall in the value of sterling – or, on the other hand, lets you lock in a favourable rate now.
– Understand your options: Look into the currency hedging tools that would serve you best. Limit orders can work for businesses that can afford to wait until the rate is right. With a limit order, you specify your ideal exchange rate, and the transaction is only completed once the currency hits that rate. You can use this in combination with a forward contract or exchanging your money on the day, giving you flexibility in your currency strategy. This allows you to hedge your bets and still take advantage of favourable market movements further down the line.
– Keep up to date on your currencies: Stay ahead of the game by looking into news or political announcements that could affect the currencies you deal with. Talking to an expert and asking about how the markets are expected to perform is also a smart move. Brexit is obviously the biggest news for the pound right now, so implementing a currency strategy well in advance of the June referendum will help protect you from unstable currencies and shifting markets.
Alex Edwards is head of the dealing desk at UKForex, part of the OzForex Group.