A look forward to trading issues in 2012

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