How you can protect yourself from increased currency costs

Goodness, what a difference a few months make! For the first half of this year sterling was moving ahead against most currencies as the coalition government took their first steps to stabilise the UK economy. Then suddenly…all change.

What exactly happened? The possibility of further quantitative easing is what happened. Investors hate the thought of Governments printing money simply to boost its economy. The UK economy is stalling and, with the recent implementation of the austerity cuts, there is a significant worry that the stall may turn into a recession.

Could you have protected yourself from increased currency costs following the sudden loss in value of sterling against the euro? The short answer is yes.

In September, a business client was negotiating a deal to import €100,000 worth of rubber from Europe. Throughout the negotiation process, the exchange rate was hovering around €1.20/£1, so the client used this as their budgeted rate of exchange for the purchase. They did not need to pay until January 2011, in which time the exchange rates could potentially move back down towards €1.10/£1, the rate seen at the start of the year. At the same time, the client didn’t want to tie up £84,000 for four months by buying the full amount of Euros there and then.

When the client came to place the order with the currency company, the exchange rate had dropped to €1.19/£1. It was agreed that there was scope to target a higher rate than €1.20/£1. It was also agreed to use a forward contract, whereby the client would secure the full €100,000 at the given rate but only pay a small holding deposit – thereby maximising cash flow until the client needed to pay. Given the market sentiment at the time, the client left an ‘order to buy’ with his currency company. This meant that when the exchange rate hit a higher level, the Euros were secured for him by the currency company at the preferential rate.

As hoped, the market moved and a price of €1.2160/£1 was secured for the client – a saving of nearly £2000. In addition, since then sterling has dropped by nearly eight per cent against the euro and is now at €1.13/£1. Currently, the client is over £6000 better off and by payment time it could be much more.

So…a very happy outcome for the client.
Are you managing your risk in the same way as this client did? We continue to be in very volatile times and who knows where to next for sterling? If the Bank of England decides to undertake further quantitative easing, will we see sterling lose further ground against the euro? Probably yes is the simple answer – but, as we all know, we could see the opposite happen as the market is full of surprises! Always consult your currency company for their input into the best course to take – it could save you a lot of money.

For more information on Smart Currency Business call: 0845 638 0571 (or +44 (0)207 898 0541 from outside the UK) or visit our website at: SmartCurrencyBusiness.com