Earlier this year, the euro was in real trouble. Populist elections in France and the Netherlands looked set to undermine the single currency, with ‘Frexit’ and a return to the French franc looking like a real possibility.
But since Emmanuel Macron comfortably won the French election and the country avoided a return to the franc, the single currency has rebounded, and is now performing extremely well. A strong euro seems here to stay – and it’s never been a better time for small British businesses to export to the continent, making the most of the competitive advantage that a weak pound affords them.
Recent data from OFX shows that 36% of UK SMEs plan to take advantage of the weak pound by starting or increasing exports in the next year. If you’d like to do the same, the following tips are a great place to start.
Understanding the effects of a weak pound
While exporters have been making the most of current exchange rates and increasing their sales to Europe, the situation is quite different for British importers. A weak pound has made it expensive to source goods and raw materials from Europe, creating a challenge for British importers looking to keep costs down and prices low.
Even so, there are still ways to protect importers from further volatility, and an expert currency partner is best-placed to advise on the approach that suits your business.
What are your options?
No matter your situation, it’s always best to consult an expert about the currency strategy that works best for your company. There’s no such thing as ‘one-size-fits-all’ here, so your best option is to choose an approach that’s tailored to your business and its individual needs.
An expert advisor will work with you to assess these needs and measure your appetite for risk, before designing with a plan for your company. Depending on your needs, this will include some – or all – of the following elements:
- Limit orders
Limit orders allow you to nominate an ideal exchange rate at which your money is automatically transferred – but only when it’s reached by the currency market.
For companies that are able to wait for a transfer, this can be a powerful tool. It allows you to profit from further movements in the market, whilst giving you the freedom to take your eyes off exchange rates and get on with other work.
Often, limit orders are combined with forward contracts, so businesses can protect some of their future transfers from unwanted volatility, whilst also benefitting from favourable currency movements in the meantime.
- Forward contracts
Forward contracts allow you to lock in today’s exchange rate for transfers up to twelve months in the future. This is a strong option for British exporters who are benefitting from the euro’s current strength, and who want to protect this competitive advantage against a potential decrease in value. It could also protect importers who are worried about the euro growing even stronger.
Though impossible to predict the future of the currency markets with 100% accuracy, a currency specialist will highlight the factors that could affect the euro in the months to come, and help you decide whether this option makes sense for you based on the current outlook.
- ‘Virtual’ accounts
For some businesses, euro-denominated ‘virtual’ accounts are a smart way to take payments from European buyers without immediately transferring them back to sterling. This allows you to choose when you make your transfer, waiting for your moment to pounce on a good exchange rate.
What does the future look like?
Although the euro’s current outlook is healthy, it’s always smart to keep an eye out for future challenges, so you’re not caught unawares by major events that could impact its value. The Eurozone crisis could well raise its head, for instance – there are still huge disparities between strong and weak European economies.
It’s also worth remembering that the euro’s strength is partly due to the relative weakness of other currencies. In the UK, sterling has been kept down by uncertainty around Brexit negotiations, while the dollar has suffered from the North Korean crisis, recent hurricanes, and election promises that have so far failed to materialise.
Whatever happens, it’s best to stay in close touch with a currency specialist, who can help you adjust your strategy to the current situation without opening yourself up to unnecessary risk.
Jake Trask is FX research director at OFX, an international payments company.