Daniel Harden, head of desk at Global Reach Partners, discusses how the General Election result will impact businesses with foreign currency requirements
Theresa May’s decision to hold this snap election has not only back-fired politically, it has also resulted in more turmoil on the currency markets.
As markets opened, the Pound was down by around 2% against the US Dollar. The FTSE 100, which has recently performed better when Sterling declines in value, opened 1.3% higher.
Earlier, the Pound fell to its lowest level in more than a month in Asia when it became apparent the UK was heading for a hung parliament. Stocks within UK-exposed companies were among the worst performers in Asia markets – hardly the strong and stable outcome the Prime Minister envisaged.
What a contrast from seven weeks ago when Sterling surged after Theresa May’s decision to hold the general election, with the markets anticipating a bigger Conservative majority that would strengthen the governing party’s position as the UK heads into Brexit negotiations.
With Brexit talks now set to begin in a few days and May saying she will hang on as Prime Minister, the Pound could be set for a rocky ride in the months ahead. Sterling is already at a low base after it sank by 20 % against other major currencies following last year’s vote to leave the European Union.
Along with the enhanced volatility of the Pound, UK businesses trading in the EU zone must also consider the threats hanging over the Euro. Events in the year ahead could still prove significant in determining the longer term fate of the single currency.
Germany’s elections, to be held in September, will certainly be critical. Despite taking a fair bit of flack over immigration policies and growing concerns about acts of terrorism, Chancellor Merkel is currently looking reasonably solid.
However, there’s still time between now and September for unanticipated events to shape the outcome of these nation-wide elections. Should more radical parties like AfD gain further traction, it could significantly impact the stability of the single currency.
The potential for fluctuations in currency values can, of course, present a threat as well as an opportunity for importing and exporting companies – if they are well-prepared, they are to capitalise on market movements.
Businesses with foreign currency requirements, especially those which trade across the UK and within EU nations, need to look at how they can best conduct their transfers strategically to manage their exposure and secure profitability.
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The starting point for developing such a strategy is to clearly understand what your level of exposure is in terms of currency movement. From there, you can set out an appropriate budget rate and create a suitable hedging plan.
Using a combination of forward contracts, option contracts and spot deals in accordance to a set currency strategy can provide certainty and protection. Ultimately, protecting a bottom line and mitigating risk is paramount in these uncertain times.
The further potential for currency instability following the UK election, along with the unfolding scenario in Europe, presents a challenge to any businesses transacting in Pounds and Euros.
We are facing at least two years, and likely more, of Brexit negotiations amid a now very challenging domestic political situation which will impact both the British and European economies.
Other events in Europe, including the German elections, could also impact on currency markets one way or another. And, looking westward, we must also consider the very real potential for the US Dollar to fluctuate significantly as the saga that is Donald Trump’s presidency continues to unfold.
Daniel Harden is head of desk at foreign exchange specialists Global Reach Partners.