From the Brexit vote and the unpredictability of the sterling, to the impending US elections, UK businesses are facing uncertainty like never before. Business buying US dollars have shortened the length of their forward contracts from an average of 90 working days per contract to less than 70 days– a decrease of over 22 per cent.
New research from World First suggests that this will leave the majority of USD-buyers unhedged beyond the Christmas period, despite the potential for greater volatility post-election, and a potential interest rate hike by the Federal Reserve.
With over a quarter of UK SMEs trading dollars, the risk to their business should currencies swing the wrong way is potentially high. This, paired with a volatile sterling, could leave those gambling on the result in a difficult position should the dollar strengthen as a safe haven currency in the event of a Trump win.
According to World First’s Q3 2016 Global Trade Barometer, UK SMEs are failing to protect themselves from this uncertainty, leaving them exposed to a £34.6 billion currency risk.
We may only really see the effects of this in the early months of 2017, says Jeremy Cook, chief economist at World First. “As we’ve seen in the aftermath of the UK’s vote to leave the EU, many businesses who left themselves unhedged by gambling on a Remain vote were caught out by the surprise result – these businesses should take heed and make sure they don’t make the same mistake twice,” Cook explains.
“Practically speaking, if hedging contracts are left to expire, those who import from the US will have to revert to spot rates. This will likely be detrimental to margins and introduce prices pressures to the UK consumer, potentially becoming the catalyst for a wave of ‘cost-push’ inflation in the first six months of 2017.”
Despite Brexit-related fears, foreign currency trading has picked up over the last quarter with both the euro and the dollar bouncing back. One in three SMEs identify the euro as the most common currency traded this quarter, compared to only 30 per cent in the previous quarter. Still, World First’s data shows that by number of trades, measured by payments reaching the EU fell more sharply (-11.8 per cent) than those reaching the rest of the world (-3.2 per cent) in Q3.
Emerging markets had a far more favourable quarter, however. Payments to Zimbabwe, Peru and Vietnam all grew by double-digit percentages, with eastern European destinations also faring well: Romania, Estonia, Latvia and Slovenia all saw inflows increase.
For Cook, calling 2016 an eventful year politically and economically would be a bit of an understatement. “SMEs have certainly felt the impact that momentous events like Brexit and an unpredictable US election have had on currency volatility. With sterling tumbling over Q3, it is unsurprising that many businesses have felt the need to alter their investment decisions.”
He advises SMEs to brace themselves for a bumpy road ahead, and after having seen the pound fall against the dollar by record amounts over the past few months. “For businesses without the right foreign exchange protection this can add a lot of pressure on margins,” he adds.
The knock-on effect also stands to impact the entire supply chain, suggesting the need to build more efficient supply chains, whether by changing suppliers and sourcing from different countries. According to Paul Langley, managing director of Swansea-based FX firm, OSTC FX, the most obvious way to avoid the increased supply-chain costs from the weaker pound is to renegotiate future deals with current suppliers or even seek out an entirely new suppliers. “Brexit’s impact on supply chains has already begun. This impact will most likely increase in complexity over time and in ways we simply can’t predict. Supply chain leaders should be proactive to get ahead of the disruption and establish a plan during the two-year negotiation period to manage FX risk. To do otherwise could be disastrous.”
