Foreign Exchange - Is your Business Brexit Ready?
It is less than 50 days to go until Brexit, and currency markets may fluctuate as we near the December 31st deadline, affecting the amount of money you may receive when making an international payment, meaning it is more important than ever to plan ahead.
How did we get here?
It is four years since the UK voted to leave the EU, but this year, the crunch year for a deal, Brexit was on the backburner for much of 2020 while the world dealt with the Covid-19 pandemic. However, with the transition deadline fast approaching, businesses and individuals need to get ready, and fast.
A crucial EU leaders’ summit in October didn’t yield a breakthrough, and the PM’s deadline for a Brexit agreement came and went by, barely causing a ripple in the markets. Johnson has told the UK to prepare for a no-deal, and while the government ‘walked away’ from negotiations, they ‘left the door ajar.’ After a few days, talks resumed and appeared to lift sterling after the renewed discussions.
What could the future hold?
Lee Cain’s resignation is seen by some as evidence that the PM might be about to agree to a trade deal with the EU. After the House of Lords voted “overwhelmingly” to strike out the parts of the Internal Market bill prejudicial to the Good Friday agreement, the PM doubled down. He intends to pursue the legislation even at the cost of trade agreements with Europe and the US. At least, that is what his team said, but given the lack of reaction from sterling, investors appear not entirely convinced.
The election of Biden also comes at an awkward time for the UK government, with the final episode of Brexit scheduled to air in the midst of the US presidential transition. Biden has criticised the bill as a threat to the Good Friday peace agreement, and if the UK does indeed end the year without an EU trade agreement, it will be more reliant than ever on cutting a deal with the US.
How could this affect businesses and individuals?
If you export or import, buying or selling goods or services from companies based abroad, you are exposed to currency risk, in a nutshell. Factors such as economic growth, interest rates, politics, Covid-19 and Brexit can all play a big part in how much your money is worth. If you are an importer for example, a strong pound tends to be good news, but if you are an exporting business, a stronger sterling can make a product or service more expensive overseas, or it could reduce margins a business is able to take home. British sterling slumped to a 31-year low after the Brexit referendum result in 2016, therefore if the UK and the EU fail to make a deal before the end of 2020, currency markets could become more volatile and the value of your payment could differ.
Where you purchase supplies from for example, to how often you do business internationally, can all add to different points of risk. So the first action as a business looking to understand its risk exposure is to identify where the risk is coming from. It can be simple, such as looking into how you are quoted or invoiced. Some overseas companies may do this in their local currency, and add a margin to protect themselves from currency fluctuations, which in turn impacts your pricing and therefore your bottom line.
Highlighted particularly during the pandemic was the pressure on international supply chains, where some collapsed as lockdowns came into play. Businesses need to be looking at their supply chains, especially those within the EU because of Brexit, and how they may be affected by highs and lows between sterling and the euro.
Could you really afford to lose over £20,000?
An example of how currency fluctuations could impact a company is a manufacturer in the UK exporting goods to the EU. Let’s say the client exports an order worth €500,000, for delivery in 90 days’ time. The price today is €1.10, meaning a return in British sterling of £454,545. Now in 90 days’ time, if the GBP/EUR exchange has moved to €1.16, then the return is now only £431,034. In other words, an exporter could lose £23,510, through no fault of their own. For a client importing from the EU, spending €1,000,000 per annum, there is the potential for costs to vary from £833,333 to £952,380 when looking at market forecasts for 2021. This means costs could differ by as much as £119,047.
Protecting your payments from Brexit
Locking in exchange rates could help secure your costs, which in turn could protect margins and improve revenue. A forward contact* allows you to plan payments ahead with reassurance and certainty, ideal for paying invoices, and if you’re protecting profits or maintaining a budget. Market orders allow you to buy currency at a set exchange rate of your choosing, with the trade being processed if and when the rate is achieved.
If you’re unsure about your currency exposure, we also offer a free FX health assessment. Using historical transaction data from your business over a 3, 6 or 12 month period, our expert team will use the data to provide accurate information on the available exchange rate on the relevant currency for each payment.
*May require a deposit and enables you to secure an exchange rate for up to two years.
Members and clients of the Hull and Humber Chamber can benefit from a free FX Healthcheck through our ChamberFX service. Please contact email@example.com for further details.