Fluctuations in foreign exchange rates can have major implications for exporters. Here, Guy Jones, director of commercial banking for NatWest in Cardiff & East Wales, looks at the current state of major global currencies and what trends we can expect for the remainder of 2013.
“International Trade can present businesses with new opportunities, but buying and selling goods in another country introduces additional risks. It’s important for businesses to recognise the foreign exchange risks involved in dealing in any foreign currency, even the so-called ‘majors’.
“For example, global events in 2008 have shown us that the pound can fluctuate dramatically against more familiar currencies such as the euro and US dollar. And with the current political and economic uncertainty in Europe, fluctuations are likely to continue.
“Even without major global events, large currency fluctuations can occur. For example, at the end of August 2011, the GBP / USD rate was above 1.65 and by October 2011 this had fallen to below 1.54. Such movements can have significant implications for businesses that are exposed to foreign exchange risk – both importers or exporters.
“We are currently creeping towards unfamiliar territory in the US as speculation increases about when the Federal Reserve will start to reduce its QE purchases. This follows six years of unprecedented monetary stimulus, ranging from aggressive rate cuts in 2007 to open ended asset purchases more recently.
“While rate hikes and a full blown exit from QE remain a long way off, the strength of the US recovery has allowed the Fed to start contemplating a gradual return to a more normal monetary policy setting – something far from the minds of ECB and BoE policy makers as their economies lag the recovery across the Atlantic. From a currency perspective, this clearly favours the dollar. But it is unlikely that the Fed will start to moderate its QE purchases until at least September which would support a move south in GBP/USD.
“The recent decline in the Japanese yen has come to a halt, following a 30% fall against the dollar and 35% against the euro. A weaker currency is a key rung in ‘Abenomics’ – the Japanese Prime Minister’s strategy of ending 25 years of economic malaise. Against a trade weighted basket of currencies, the yen is at levels not seen since 2007, a year in which the Japanese economy grew 2.2%, supported by export growth of 8.7%. This was achieved against a backdrop of global trade growth of c8%. Exporters will have to compete with trade growth around half of that rate in 2013.
“The good news is that businesses do not have to be exposed to currency risks like these – unless businesses make a conscious decision they want to. Banks can work with businesses to provide greater certainty for cash flow planning and indeed preserve hard won profit margins against adverse currency movements.
“Very often the simplest form of protection involves forward contracts which book a currency rate in advance so profit margins can be calculated and preserved. Variations around Currency Options can also be accommodated and modelled to the specific overseas trade. The best guidance would be to always involve your bank to identify the most appropriate foreign exchange protection.”
For more information visit www.natwest.com/business/international-banking.ashx