Currencies fluctuate – and as more and more firms have their eyes on international opportunities, Business Voice asks Stuart Wilson, director, UK Corporate FX Sales at RBS Markets, about the impact that can have.
Q. Why should businesses – of any size – care about currency risk?
A. It matters. We deal with thousands of businesses doing international trade over the course of a year. Every one of them is trying to drive a better deal or a better price with their overseas’ partners in an attempt to save one or two per cent. If currency exposure is involved, those savings could be wiped out overnight. It can potentially make contracts go sour very quickly.
Q. What would you say to smaller businesses that don’t think they import or export enough to worry about this – or who are put off from expanding overseas because of it?
A. It doesn’t have to be complicated. It’s just like managing any other risk. They would be off to a good start if they simply involved their finance team from the outset, as too often the implications of currency movements are an afterthought.
Q. Do you have an example of where currency volatility has had a big impact on a business?
A. Even experienced companies can get this wrong. For example, a successful UK manufacturer won a two-year contract in Australia. On winning the contract they didn’t like where the exchange rate was, at AUD1.8 to the pound, and assumed it would get better, so consciously held off from hedging their currency exposure. Instead the weakening Australian dollar saw that rise to AUD2.15, wiping more than 15 per cent off the value of the contract. That turned what was an exciting business win into something far less profitable.
Q. Is the risk higher with some currencies than others?
A. The important thing is not to be lulled into a false sense of security and think that any currency is more benign than others. Emerging market currencies have made a lot of headlines. They include Asian and South American currencies, the South African rand, Polish zloty and Turkish lira.
But there has been significant movement in the dollar to pound and dollar to euro exchange rates too. Between Q3 2014 and Q2 2015, the dollar to pound rate shifted from 1.72 to 1.45 – a 16 per cent fall; and the dollar to euro was down 25 per cent between Q2 2014 and Q1 2015. Small shifts might not look like much on a day-to-day basis, but the impact mounts up on long-term contracts.
It’s also worth noting that currency volatility is at historical lows at the moment as major markets follow similar monetary policies. When they start to diverge, we may well see more movement.
Q. How can risks be mitigated?
A. A bank can help you hedge your risks, but there are other more simple steps you can take. You might be able to better match costs and revenues in the currencies you use to reduce exposure, creating more of a ‘natural hedge’. You might be able to incorporate a mechanism into contracts to reprice goods or services once a certain currency threshold is reached, so you’re effectively passing on the risk or sharing any impact. You should also make sure that you’re getting the most appropriate FX rates from your bank, as discounts will apply the more you use.
The right risk management strategy will depend on your business. But where your exposure is big enough, talk to your bank’s specialists.