Brexit Guide for Businesses: Do Not Neglect Currency Strategy
The citizens of the United Kingdom have voted for their nation to exit the European Union, a move more popularly known as Brexit. The results of the vote have shocked many, with its impact being most obvious, perhaps, when observing the volatility of the pound. In the days following the announcement, the pound fell to a historic 31 year low against the US dollar.
While those with a home currency of USD or Euros may be benefiting from this sudden change, it is a challenge to predict how long the pound’s slump will last. The results of Brexit will continue to affect the pound as the United Kingdom navigates the uncertainty of departure from the European Union. What will happen to trade agreements established through the United Kingdom’s membership to the European Union? Will Brexit cause less money to be pumped into the British economy? Or, will the United Kingdom, as predicted by the Leave camp, emerge victoriously from this break, reclaiming economic independence with a boom in exports and tourism, thanks to the weaker pound? These questions are just some of the issues affecting the volatility of the pound, and contributing to the uncertain economic climate in the United Kingdom.
Until the outcome of the United Kingdom’s decision to leave the European Union is clearer, the pound will continue to be volatile. What does this mean for businesses that send or receive payments internationally with GBP? Often, businesses transfer money by default, or have an, “accidental” currency strategy, choosing to go through their bank rather than exploring other options. The volatility of the pound caused by Brexit makes this a more important time than ever for you and your company to have an effective currency strategy. An accidental currency strategy can cause unnecessary costs and loss to your company, especially with a post-Brexit pound. If your business sends or receives payments internationally and uses GBP, it is more important than ever to develop a proactive currency strategy. This guide will assist you in navigating international payments post-Brexit, and introduce you to various currency strategies to consider, including engaging with a currency specialist to further assess your business’ international payment procedures.
Your International Payments Over the Coming Months
Currency value is challenging to predict for seasoned economists in calm economic times, let alone economic climates that have recently experienced upheaval, such as the post-Brexit economy. If your company regularly sends or receives payments internationally and you are exposed to, or your home currency is, GBP, you will want to devise a currency strategy to prevent unnecessary loss. As the pound’s value continues to fluctuate, also known as currency volatility, it will be challenging to predict what your true buy or sell rate will be for various transactions.
A currency broker, also known as a currency specialist, can be of great value to a company when developing their currency strategy, particularly in a more volatile time than usual, such as the current state of affairs in the United Kingdom, due to Brexit.
Suppose you run a small drug store, and your business regularly purchases €45,000.00 worth of cosmetics from France once-a-month. One of the challenges of a post-Brexit economy will be adjusting your finances accordingly, as you will now need more pounds to buy the same amount of product. You’ve never given much thought to a currency strategy before, and your business usually transfers money through your bank. However, the fluctuating exchange rate (also known as currency volatility) has caused you to take a closer look at reported exchange rates. As you go over your expenses, you realise that suddenly you need more pounds to buy the same amount of Euros that you buy every month.
Before you transfer money through your bank, a glance at the exchange rate offered to you by the bank seems rather high compared to what you are seeing as current, or spot, exchange rates. This is because banks generally add to an exchange rate, something known as the fx spread, before exchanging money. Because currency brokers focus solely on currency, unlike banks, they are able to offer more competitive exchange rates.
The table below, from FXcompared’s June 2016 International Money Transfer Index™ report, also known as the IMTI™, illustrates the difference in fx spread between banks and currency brokers, with currency brokers adding a much lower fx spread to their offered exchange rates.
At a time when the pound will not go as far as it typically does, using a currency broker can offer you a better exchange rate and prevent unnecessary loss or costs in your financial transaction. According to FXcompared’s Business Intelligence data, even in a Post-Brexit economy, by using a currency broker to transfer €45,000 to France from the United Kingdom, you can save £899.82 on average, versus transferring through your bank. Furthermore, this theoretical transaction does not even employ hedging tactics designed to alleviate currency risk that a currency broker can assist you in developing.
As with any financial business decision, performing due diligence is key when choosing a currency specialist. It is important to compare multiple providers before making international payments, particularly at a time when the pound is more volatile than usual, and different brokers may take this into account with their chosen rates. FXcompared’s Comparison Tool can assist you in this decision.
Future Money Transfers
What if you know your business will be making a large international purchase in three, or perhaps six, months? How can you effectively plan and budget for a large international purchase with a constantly fluctuating exchange rate?
For example, perhaps your company, already international, has decided it wants to buy an office in Paris to further its international presence. You are currently renting an office, and the lease will be up in 6 months. You know your budget is approximately £1,000,000.00, but it is difficult to predict what that will be worth when the time comes to purchase a building, particularly in six months from now.
What if you happen to see a favourable exchange rate, but you are not set to transfer money for months? A currency specialist can assist you with this, by offering you something called a forward contract.
A forward contract is a private agreement between a buyer and seller, in which the buyer agrees to purchase a certain amount of currency at an agreed upon exchange rate at a specific date in the future. Because the price of a forward is partially based upon the current rate, or spot rate, of a currency, taking a forward contract out when the exchange rate is favourable is ideal, and can help save company money. In addition to being influenced by the spot rate, the forward price and rate is determined by length of the contract, the volatility of the currencies and interest rates, with longer contracts generally being more expensive.
There is a risk, with forward contracts, that the market rate will be more favourable to you at the time of purchase. However, given that this amount has already been budgeted, it can also be seen as an effective accounting tool, as you will know your company budget months in advance. For the most part, forward contracts can help your company save money and budget accordingly, two valuable aspects of running a business. Alternatively, if you did not use a forward contract, you would be stuck with the challenge of attempting to predict what the exchange rate will be, a feat challenging to even the most seasoned economists.
A forward contract allows you to mitigate the risk of currency exposure and to plan your budget in advance. Learn more, by exploring different currency specialists on our site today.
The value of currency changes constantly throughout the day, hours, even minutes. This is called currency volatility. Even currencies we deem to be stable can sharply lose value, as we are witnessing with the pound, post-Brexit.
The value of currency is complex, and is influenced by a variety of factors, including current affairs, political climate and basic economic performance in a country. Uncertainty is arguably the most damaging factor to a currency’s value, and Brexit has left the state of the British economy uncertain, contributing to declining pound rates.
It is worth noting, that currency constantly fluctuates, and though the pound is a lower value than usual right now, it will still change value constantly, and hedging currency risk should not be overlooked, simply because you will already be losing money in a transfer.
To assess and observe how Brexit has affected currency volatility across the board, use FXcompared’s currency volatility tool.
Has Brexit made you aware of your lack of currency strategy? Are you curious to observe how effective your international transfer methods have been in saving company money? At a time when company budgets are in need of more cash flow, a direct strategy for international transfer can save company money. Oftentimes, companies that send and/or receive payments internationally participate in a currency analysis, sometimes called a currency audit. A currency analysis allows your company to look back at past international transactions to assess how effective your currency strategy is. With a detailed currency analysis, you can observe whether your company had unnecessary costs or losses in past transactions.
Look back at your currency strategy and assess multiple international transactions with our Currency Analysis Tool. Simply input the amount of currency send and the amount of currency received, and the date. You can input this information multiple times, and compare multiple transactions. The first step to a sound currency strategy is being proactive. Don’t let your company fall prey to an accidental currency strategy. Assess your international transactions today, with our Currency Analysis Tool.