With more businesses pursuing sales in far-flung international markets, exposure to more local or ‘exotic’ currencies needs to be managed. Mark Ackroyd, a dealer at foreign exchange company Global Reach Partners, explains.
The business climate in the UK over the last three years has squeezed profit margins and ensured that competition is rife across most sectors. More than ever, British companies are wandering further off the beaten track in order to grow their business and to gain an edge over the competition.
One such route to growth is the expansion into markets further afield and the resulting exposure to more local or ‘exotic’ currencies. An ‘exotic’ currency is one where market trading volumes are low and access to buying and selling is often difficult.
It is becoming clear that having the ability to deal in these currencies can be hugely beneficial to businesses wishing to trade internationally. Using ‘exotic’ currencies can open up markets and opportunities that were previously closed to businesses as they provide access to new products and/or customers.
These markets are often an untapped resource for British business because of previously insurmountable barriers to entry of the delivery of local currencies. Experience shows that being able to source products from less conventional trading partners such as many South American, Asian and African countries, rather than targeting more obvious markets in Europe, the US or at home, allows small and medium-sized companies to be more flexible with their supply.
Access to local suppliers that require payment in local currencies, provides a competitive advantage for the importer as they can experience price stability, lower costs, higher quality of goods or specialised products that bring high returns.
Being able to trade in local or ‘exotic’ currencies can also reduce competition from domestic rivals. When negotiating contracts globally it is often a ‘unique selling point’ to be able to pay or be paid in the home currency of the trading partner rather than reverting to a global currency, such as the US Dollar.
This is viewed favourably with trading associates, particularly local suppliers, and could prove the difference between winning and losing certain contracts internationally. An excellent example of this currently can be found in China.
The Chinese currency (the Yuan) has long been pegged to the US Dollar, it has become less willing to conduct international trade solely in Dollars, as was the norm. The ability to deal in the notoriously difficult Chinese Yuan has quickly become a major source of competitive gain for some UK firms and has provided a way in to one of the world’s largest and fastest growing markets.
There are clearly significant rewards to be reaped by businesses that are willing and able to enter new regions but it would be a miss to ignore the potential risks and pitfalls of trading internationally within these emerging markets.
Exotic currencies, by the nature of being thinly traded (i.e. low trading volumes) are more volatile relative to the major currencies, such as the Pound, Euro or US Dollar, that UK businesses may be more used to dealing in. Wild swings in the exchange rate of these currencies over short timeframes are not uncommon.
Dealing in these currencies should therefore go hand in hand with an appropriate hedging strategy to mitigate the exchange rate risk and ensure that profit margins are not exposed by adverse exchange rate fluctuations. Exchange rate certainty here is key, hedging against significant market movement provides peace of mind and clear profit forecasting for businesses dealing in these exciting new markets.
Barriers to entry, such as language and trade restrictions, may still exist in some areas but the ability to trade and deliver local or ‘exotic’ currencies removes a significant obstacle to trade globally. The business world continues to get smaller. These currencies will increase in importance as companies continue to look outside mainstream markets, as rewards have proved to be well worth the risk.