2011 was a challenging year for businesses engaged in international trade – and 2012 promises to be no different. Charles Purdy, Director of Smart Currency Exchange looks at what the New Year might bring and the implications for currency markets.
Towards the end of September it was widely reported in the media that there were just six weeks left to save the euro. Well, that deadline has come and gone and, as I write, we are seeing the first specks of snow in the month of December. The euro crisis rumbles on and the idea that it will somehow be solved with one piece of decisive action is, to say the least, far-fetched.
What can we expect, then, in 2012 and, more pertinently, what are the implications for currency markets? We work with many businesses that trade internationally. Whether they be importing raw materials from abroad or selling in international markets, or a combination of both, all have been impacted upon by currency fluctuations during 2011. I don’t expect that situation to change during the next 12 months.
As far as the €/£ exchange rate is concerned, in 2011 we saw a high close to 1.20 and a low at 1.10. For the US$/£ the range has been quite narrow - a low of 1.55 and a high of 1.65.
The paradox is that, against the backdrop of the eurozone crisis, currency volatility was less in 2011 than in 2010. One might conceivably have expected a significant decrease in the value of the euro due to the clear weaknesses of some of its member states – notably, Greece, Italy, Portugal, Ireland and Spain. The reason the euro has held up relatively well, however, is that the markets clearly recognise that the possible fallout of the euro would be global with contagion spreading far and wide from the eurozone.
It is also worth pointing out here that, while volatility may have fallen in 2011, the range that the exchange rates are moving between are still large and could still have a very significant affect on importers and exporters. As any international trader will tell you, small currency movements can have a seismic financial impact on large orders.
As far as the eurozone is concerned, then, I am not anticipating that the problems we are currently witnessing will go away anytime soon. The debt crisis in the eurozone is likely to lead to recessions in the UK and across EU member states. Any economist will tell you that, as far as debt is concerned, there is only so long you can kick the can down the road.
The US has similar problems to the EU. Debt is a huge issue there. Moreover, unemployment across the pond is stuck stubbornly – and worryingly – at the ten million level.
The implications of all this on interest rates are that they are likely to remain historically low in both the US and UK. Don’t expect any rate rises in either country in 2012. The eurozone may actually reduce rates having unwisely increased them in mid 2011.
In terms of how things might actually pan out in the eurozone, we may see it completely unravel. A Greek or Italian withdrawal is not out of the question. This would see these former member countries returning to their pre-euro currency – the Greek drachma and Italian lira respectively. As weak economies, both currencies would be extremely weak – and volatile – emphasising the need for great care with regards to currency strategy amongst UK plastics and rubber firms doing business in either.
Could we see a German withdrawal from the euro? Interestingly, while Germany is commonly recognised as one of the two lynchpins of the eurozone – along with France – many see its withdrawal as the least painful way forward. The reason is that Germany’s withdrawal would – all other things being equal – see a devaluation of the euro. And this devaluation, in trading terms, would greatly benefit remaining members and may bring some respite to the beleaguered Italy, Greece, Portugal et al. In the meantime, the German deutschmark would be greatly valued – a reflection of the country’s relative strength right now.
The message in all of this is clear for businesses trading internationally. There is no easy way forward for the eurozone and, indeed, global economy. Currency fluctuations and uncertainty are with us for the foreseeable future. Consequently, having in place a robust currency strategy is not just useful right now – it is an absolute prerequisite.
The failure to manage your risk properly - by using hedging tactics such as currency forwarding - could impact greatly on the profitability of your business in 2012 and beyond. That is why it is so important to deal with a knowledgeable and understanding expert to make sure you get your currency strategy correct.
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
Wednesday, 14 December 2011
Tuesday, 13 December 2011
How does the volatility of the currency market affect your business?
“Even after 25 years of working in international trade, the unpredictability of the currency market still affects my business” says Mike Harling, founder and managing director of Whitefield International.
Mike set up Whitefield, a international business consultancy, in 1999, after more than a decade’s experience in the industry, living and working both in the UK and abroad. In any given year, 85-90% of Whitefield’s turnover is with clients based outside of the UK, and invoiced in a foreign currency.
Consequently, Mike’s exposure to currency fluctuations can have a huge impact on his business. He explains: “We agree to do a certain amount of work for a certain amount of money, but when the exchange rates go against us we end up earning less money for the same amount of work.”
Until six months ago Mike was using his bank for all of these payments. “I checked the market exchange rates on a daily basis, and realised that I was getting a poor deal from my bank. This led me to look at alternative solutions.”
Mike’s search led him to Smart Currency Business:
“I looked around at many options, and soon narrowed it down. I did a lot of research – found many positive comments from other clients, found that Smart was a solid business with solid financials, so I got in touch.”
“What impressed me most was that I immediately got through to a real person, and when I rang back a few more times with more questions I could again talk to the same person I’d initially spoken to. For me this is vital – without that personal touch, I wouldn’t be using Smart. I’m delighted with the service I’ve received, and am looking forward to this being a long-term partnership. I’d be happy to recommend Smart.”
Whitefield International estimates that in the three months they’ve worked with Smart they’ve already saved around £1500-2000. In addition to this they can now arrange forward contracts where the exchange rate is fixed in advance, reducing the risk of market volatility. Mike says “I’m convinced that if any business has exposure to currency it’s definitely worth switching. Even if it’s only £100 per month, it’s better in your business’s pocket than in the bank’s.”
Mike’s message is clear. Managing your foreign currency exposure effectively is a vital requirement of any business that deals internationally.
Predictions for 2012
Smart Currency Exchange's Nick Ryder gives us his predictions for the year ahead.
This time last year we warned that the biggest issue for the global economy in 2011 would be the worsening debt crisis in the eurozone and this has certainly been the case. Little did anyone know though how the shockwaves of this would impact on major economies.
Whilst 2008 was about bank debts, 2011 was the year of sovereign debt and this is set to continue into 2012. Markets rallied in 2009 once banks had been freed of their toxic debts and underwritten by their governments. However, like in 2007-8, market scrutiny in the last year has focused on countries and their ability to repay their debts. Bond markets have hounded the ‘peripheral’ countries of the eurozone and caused the successive resignations of two Prime Ministers in
It has been another rollercoaster of a year for sterling. The pound started the year well against the euro, hitting a high of €1.2070/£1 in early January but quickly fell off and spent much of the rest of the year languishing in the mid-teens against the single currency – even hitting a low of €1.1040/£1 in the summer as market confidence in the UK’s recovery in the face of austerity waned. Against the US dollar, sterling has ranged between a high of $1.6740/£1 to a low of $1.5270/£1.
When compared to 2007-08, sterling’s performance in 2011 could almost be seen as flat. Whilst sterling has not dropped off a cliff like it did at the beginning of the credit crisis, it has remained extremely volatile within the range that it has traded in and this has (as ever) been incredibly problematic for companies dealing in other currencies.
For a medium-sized business importing $500,000 worth of goods from
Where next for sterling?
David Cameron’s veto of a revised European treaty has attracted widespread criticism from his own Deputy Prime Minister and other europhiles. However, the move could yet be seen to be a stroke of genius. With the euro saga getting worse and worse, the move to keep the toxicity of the region at arm’s length feels like a smart one. Head of the IMF Christine Lagarde referred to a ‘lost decade’ that is likely to hit
There is also an increasing likelihood that we will see some form of euro break up, with
Against the US dollar, the resurgence of the US dollar as a safe haven currency in the past few months has meant that sterling has struggled. Massive intervention in the currency markets by the central banks of Switzerland and Japan has meant that the more traditional options of using the Swiss franc or Japanese yen as a holding currency when markets are volatile has been taken away.
This has left the US dollar as the only option and with huge market concerns over the impact of the euro debt crisis; capital has flowed from sterling into the US dollar as investors look for safety. As a result, many analysts feel that we could see sterling return to exchange rates in the $1.40s against the US dollar.
What should you do to protect yourself? Putting a currency strategy in place is key. Use forward contracts to secure rates of exchange and speak to a currency specialist about the best way forward over the next 12 months.
The Euro - What lies ahead?
Carl Hasty, Head of Trading at Smart Currency Exchange, looks at the prospects and implications of the potential collapse of the euro - originally published in Business Scotland magazine, October 2011.
It is now 12 years since the European single currency – the euro – came into existence, with 2002 being the year in which euro notes and coins were officially introduced.
For many, the euro was seen as a natural continuation of further and deeper European integration. While the likes of the UK and Denmark chose to stay clear, this new currency has, for the majority of its lifetime, proved a success. Talk to any UK exporter and they will tell you about the convenience and greater certainty of dealing with just one currency across the EU, the world’s largest free trade zone. And yet the euro has started to wobble.
Poorer member states such as Portugal, Ireland, Greece and Spain (the PIGS) are struggling with huge debt problems. At the time of writing an EU summit is due to take place on the debt crisis to allow ministers to bolster indebted European banks and finalise the next tranche of Greek bailout money.
So what is the likelihood of the euro collapsing and what are the implications? Many see its downfall as highly unlikely, arguing that the political will within the European Union is simply too strong – and consequences too dire – to allow it. That said, there have been some worrying signs coming out of Europe.
Pipi Malmgren is a consultant for Deutsche Bank and the former Special Assistant to the President of the United States for Economic Policy on the National Economic Council. She was recently quoted in the press as saying that Germany will abandon the euro and reintroduce the Deutschmark.
“The markets are very likely to have to contend with the re-introduction of Deutschmarks in the near future…this step may seem unthinkable but I believe that the German government is telling us in multiple ways that there is no other solution from their point of view,” she said.
Add to this the fact that the German public is said to be growing disillusioned with its government’s key role in helping bailout Greece – and possibly soon other states – and the crisis facing the euro becomes even more apparent. Germany, let’s remember, is the anchor economy within the euro.
IMPLICATIONS OF GREEK WITHDRAWAL
There are several possible scenarios as to how the eurozone might unravel. The first – and possibly the one you’d get shortest odds on from a bookmaker – is Greek withdrawal. As far as practicalities go, this would see all Greek bank accounts redenominated into drachma and prices following accordingly. The ‘new’ currency would be weak, a reflection of the huge structural challenges facing the Greek economy. As such, the run-up to Greek withdrawal may see a run on Greek banks as depositors sought stronger currencies or assets.
Further shrinkage of the eurozone, with the withdrawal of other poorer countries such as Spain, Portugal and Italy would, again, see these countries return to their previous currencies. Again, these currencies would be weak and capital would likely flow from such countries in the run-up to withdrawal. Good news, then, for holidaymakers; bad news for UK firms doing business in these parts of the world.
In theory, the exit of poorer countries from the euro would boost the exchange rate of the euro against other currencies around the world. Accordingly, the UK’s trade position against some of its key European trading partners would profit from an effective devaluation of the pound.
THE NIGHTMARE SCENARIO
A complete collapse of the euro is the nightmare scenario. Such a scenario could pan out in several ways. What seems certain, however, is that a total collapse of the euro would cause chaos in global markets. Confidence in some currencies would disappear while others would become hugely valued – creating massive issues for businesses in these countries in terms of their ability to compete abroad.
Other likely outcomes: we might see a rise in protectionism; we’d almost certainly see a scramble for hard assets such as precious metals; we may even see growing hostility between former members of the eurozone. Confusion would reign as the markets reacted in the only way they know how to react to the kind of uncertainty an event like this would create – sporadically.
Various estimates have been made about the impact of a collapse of the euro on the GDP of EU countries. Some go as high as a 50 per cent reduction for poorer EU states and 25 per cent for richer ones. Halve these figures and they still look dreadful.
The coming weeks and months will see more ups and downs in the Eurozone and more heated debate amongst European leaders about how best to address the monumental challenges facing some of its poorer member states. Bailouts might not seem an ideal option but they may well be a necessary evil. The alternative doesn’t bear thinking about; the stakes couldn’t be higher.
Q&A with Robin Copestick (Director, Copestick Murray)
What’s the background to your business?
We work with global wineries and major retailers. In 2006 we founded Cornerstone US Wine Imports, which works closely with Tesco’s
How does foreign exchange impact your business?
We have had many different challenges with the fluctuating nature of currency over the past few years. Sometimes it creates opportunity, at others problems for retailer, supplier and importer. All our businesses are growing exponentially and the currency side is becoming very complicated. We need to be quite precise when dealing with the exchange rates to ensure our margin is protected.
How do you protect yourself?
The moment we know we have an invoice for, say, €500,000, we protect our margin by doing the exchange there and then. If the exchange rate moved against us, we would not be making any profit on the deal. We would much rather protect the profit we have rather than speculate that the exchange rate will move in our favour.
In the
What is the biggest currency issue facing your business?
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Some have taken our advice and reaped the benefits, others have not and have often been left exposed.
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