Check that the company you are dealing with is a fully FSA regulated “payment institution”. You can check the register at www.fsa.gov.uk/register/home.do
Make sure the company keeps client’s money in a separate bank account. You can ask them for a letter from their bank that will show this
Avoid companies that ask you to pay the full amount upfront for a forward contract (i.e. money that you pay at today’s exchange rate but actually transfer in the future). They should only ask for a small deposit of say 10%
Avoid companies that do not require a deposit at all for a forward contract. This may sound strange but if they are doing this for all their customers they may have more risk than they can cover
Avoid companies that are offering you a rate the same as the “interbank” market rate or better than it. The interbank rate is the rate banks deal with each other in very large amounts and effectively it means they are getting absolutely no profit out of your transaction. Personally I would ask myself why…You can find interbank rates at www.worldfirst.com
Avoid companies that don’t require you to provide any identification documents. These are required by law in terms of money laundering regulations. If they are not doing the required checks it may suggest that the company is not a registered money services business.
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
Friday, 10 December 2010
Wednesday, 17 November 2010
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
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
Wednesday, 20 October 2010
Security of funds
Each day millions of pounds flow through our client accounts and the security of these funds is paramount.
From the first day that Smart Currency started business in 2005, the funds of the business have been kept separate from the funds that belong to the client. This means that, in a worse case scenario, the funds still belong to client and not to the company.
In November 2009 new regulations were introduced. Effectively this meant that companies like ours that wanted to carry out international transfers and were of sufficient size had to register with the FSA as Payment Institutions [PI’s]. We were delighted to do so; this meant that the way we had always operated was now recognized as the best and the safest way to operate, namely with client’s funds held separately and thus properly safeguarded.
I think it is worth highlighting that not all companies who carry out international transfers are PI’s. Companies with a turnover below a certain level can operate as Small PI’s [SPI’s], which come with a different set of requirements. These do not include operating separate client accounts.
Crown Currency was such a SPI; they specialised in holiday money and they were not required to keep their company’s money and the client’s money separate. This meant that, when problems arose, the clients lost out - a very unsatisfactory position if you happen to have been one of their clients.
Another key requirement that the FSA introduced for PI’s is that they should have a minimum level of permanent equity in the company. At Smart Currency we exceed the minimum level of permanent equity required by the FSA by a very significant margin. And, as our business grows, we ensure that the level of permanent equity we hold in the business increases too.
I hope this is of assistance in providing a better understanding of how secure your funds are with Smart Currency. Our aim is to help you reduce the costs of your transfers, make them more efficient and to eliminate the risk and stress of that transfer.
If you would like to discuss any of the above please feel free to give us a call on 0207 898 0541 and we will be more than happy to go through it in detail.
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
From the first day that Smart Currency started business in 2005, the funds of the business have been kept separate from the funds that belong to the client. This means that, in a worse case scenario, the funds still belong to client and not to the company.
In November 2009 new regulations were introduced. Effectively this meant that companies like ours that wanted to carry out international transfers and were of sufficient size had to register with the FSA as Payment Institutions [PI’s]. We were delighted to do so; this meant that the way we had always operated was now recognized as the best and the safest way to operate, namely with client’s funds held separately and thus properly safeguarded.
I think it is worth highlighting that not all companies who carry out international transfers are PI’s. Companies with a turnover below a certain level can operate as Small PI’s [SPI’s], which come with a different set of requirements. These do not include operating separate client accounts.
Crown Currency was such a SPI; they specialised in holiday money and they were not required to keep their company’s money and the client’s money separate. This meant that, when problems arose, the clients lost out - a very unsatisfactory position if you happen to have been one of their clients.
Another key requirement that the FSA introduced for PI’s is that they should have a minimum level of permanent equity in the company. At Smart Currency we exceed the minimum level of permanent equity required by the FSA by a very significant margin. And, as our business grows, we ensure that the level of permanent equity we hold in the business increases too.
I hope this is of assistance in providing a better understanding of how secure your funds are with Smart Currency. Our aim is to help you reduce the costs of your transfers, make them more efficient and to eliminate the risk and stress of that transfer.
If you would like to discuss any of the above please feel free to give us a call on 0207 898 0541 and we will be more than happy to go through it in detail.
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
Friday, 24 September 2010
How To Better Manage Your Currency Exposure
In today’s erratic financial climate companies need to take all the precautionary measures they can to ensure that deals they make do not break the bank when it comes time to actually paying for them some time down the line.
Clearly, a key part of that process is for a business to cost the project properly. And, if buying from or selling to a company abroad, it needs to make quite sure that it has costed in realistic currency exchange rates. It must also know how to manage the risk of those exchange rates moving against what has been budgeted.
Using a forward contract can be a powerful tool in hedging your exposure.
Since the beginning of 2009, the €/£ exchange rate has moved between €1.02/£1 and €1.22/£1. That is a difference of 20 per cent.
So, if you were importing or exporting goods with a euro value of €1,200,000, you could be looking at a sterling figure of either £1million or £1,200,000. Put simply, if you get it wrong, you could be looking at increased costs, or lost income, of £200,000.
So…which would you prefer? You could get it right and benefit by that amount or you could find yourself scrabbling around to find an extra £200,000.
It’s a no-brainer.
How do you make sure that you are not caught out by an exchange rate that goes against you? By taking out a forward contract is the answer.
What does a forward contract do? It secures an agreed amount of currency at an agreed exchange rate for an agreed date in the future, secured by a small deposit. And you don’t have to pay the balance of the full amount until that agreed date unless you so wish. And, if need be, you can extend the agreed date.
So, in this example: you may budget an exchange rate of €1.11/£1 so the expected cost/income was £1,081,081. And, if we assume we were buying goods from Europe and were able to secure a forward contract at say, €1.15/£1, then you would have reduced your cost to £1,043,478 – a saving of £37,603 which flows to your bottom line. Better than having to buy at an exchange rate of €1.02/£1 and face an additional cost of over £95,000 – probably turning a profitable contract into a loss!
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
Clearly, a key part of that process is for a business to cost the project properly. And, if buying from or selling to a company abroad, it needs to make quite sure that it has costed in realistic currency exchange rates. It must also know how to manage the risk of those exchange rates moving against what has been budgeted.
Using a forward contract can be a powerful tool in hedging your exposure.
Since the beginning of 2009, the €/£ exchange rate has moved between €1.02/£1 and €1.22/£1. That is a difference of 20 per cent.
So, if you were importing or exporting goods with a euro value of €1,200,000, you could be looking at a sterling figure of either £1million or £1,200,000. Put simply, if you get it wrong, you could be looking at increased costs, or lost income, of £200,000.
So…which would you prefer? You could get it right and benefit by that amount or you could find yourself scrabbling around to find an extra £200,000.
It’s a no-brainer.
How do you make sure that you are not caught out by an exchange rate that goes against you? By taking out a forward contract is the answer.
What does a forward contract do? It secures an agreed amount of currency at an agreed exchange rate for an agreed date in the future, secured by a small deposit. And you don’t have to pay the balance of the full amount until that agreed date unless you so wish. And, if need be, you can extend the agreed date.
So, in this example: you may budget an exchange rate of €1.11/£1 so the expected cost/income was £1,081,081. And, if we assume we were buying goods from Europe and were able to secure a forward contract at say, €1.15/£1, then you would have reduced your cost to £1,043,478 – a saving of £37,603 which flows to your bottom line. Better than having to buy at an exchange rate of €1.02/£1 and face an additional cost of over £95,000 – probably turning a profitable contract into a loss!
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, 1 September 2010
Deflation or inflation - which will win?
Over the last 18 plus months the economies of the western world have been recovering, albeit slowly, from the depths reached in late 2008 and early 2009.
Most people must have thought this was inevitable, as surely the only way was up for the world’s economies, given the extent of the pull back we had seen in production and sales.
But it is important to remember that the governments of the western world had thrown everything at their economies - including the kitchen sink - in an effort to kick start them. Also, it has to be remembered many companies destocked at the start of the crisis and some of the growth.
Here in the UK, the level of government debt grew significantly and our budget deficit spiralled out of control as they battled to save a number of banks and pump money into the economy. But this can’t go on for ever and the new coalition government has made it clear that government costs have to be slashed and the books balanced as soon as possible.
Similar actions are being made elsewhere. The embattled southern states of the euro zone; Spain, Greece, Italy and Portugal, are implementing their own cuts in government spending and as such, we see businesses suffer and unemployment rising.
In the US, we saw the withdrawal of various incentives used to encourage people to consume when the “cash for clunkers” and the homebuyers tax credit were both withdrawn. The slump in house sales that followed the withdrawal of the homebuyers tax credit resulted in its reintroduction for a further 6 months - but the effect this time round is proving to be somewhat muted, with exiting house sales for July 2010 hitting a 15 year low.
And where has all this money that has been pumped into the banks ended up? Mainly in their balance sheets rather than being lent to their customers. There are a number of reasons for this.
The banks themselves have to rebuild their balance sheets to cover their losses, both actual and possible and they are also being forced to increase capital levels under new legislation. And the final reason is that their clients are borrowing less because their working capital requirements are reduced given the lower level of activity.
So, we are now beginning to see most western economies beginning to falter and this is worrying their respective governments as it raises the spectre of deflation.
Pimco, one of the worlds biggest fund managers, have carried out two detailed analyses in the last 12 months on the state of the US economy with the aim of working out how likely the US is to suffer from deflation.
First time round they calculated the chances at 10%. This time around they have calculated the chances at 25%. Quite an increase.
So why are the “powers that be” so scared of deflation?
There are a number of reasons, but the one that stands out in my mind is an almost self reinforcing economic cycle that ends up in a deflation spiral.
Consumers start saving because times are tough. This reduces consumption. Prices then come down as sellers try to stimulate demand. But consumers decide to hold off buying as they believe the goods will be cheaper next month. Sellers reduce prices further and consumers decide to delay buying yet again. So on it goes.
Okay, this is a very simplified economic model, but in many ways, it mirrors what has happened in Japan for the last two decades. It is also has a huge affect on employment which falls away as the sellers are unable to sell their goods and have to lay people off.
Japan has its lost generation of unemployed and a banking system that is still full of bad debts that should have been written off a long time ago.
So a lot to be frightened of if deflation comes to the economies of the western world, but how likely is this?
As per the Pimco’s analysis, I think the likelihood of deflation is higher than people think.
Consumers are scared. Clearly low interest rates are helping those with debts, but if economies aren’t growing and people’s jobs aren’t safe, all they will do is pay off those debts and start saving for a rainy day.
Governments have much less ammunition in their armoury than they did 12 months ago and will be unable to try and fund growth in the same aggressive way - and banks are rebuilding their broken balance sheets rather than lending.
So the alternatives seem fairly simple.
A one in four chance of deflation - or a three in four chance of growth - albeit somewhat muted for the next few years.
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
Most people must have thought this was inevitable, as surely the only way was up for the world’s economies, given the extent of the pull back we had seen in production and sales.
But it is important to remember that the governments of the western world had thrown everything at their economies - including the kitchen sink - in an effort to kick start them. Also, it has to be remembered many companies destocked at the start of the crisis and some of the growth.
Here in the UK, the level of government debt grew significantly and our budget deficit spiralled out of control as they battled to save a number of banks and pump money into the economy. But this can’t go on for ever and the new coalition government has made it clear that government costs have to be slashed and the books balanced as soon as possible.
Similar actions are being made elsewhere. The embattled southern states of the euro zone; Spain, Greece, Italy and Portugal, are implementing their own cuts in government spending and as such, we see businesses suffer and unemployment rising.
In the US, we saw the withdrawal of various incentives used to encourage people to consume when the “cash for clunkers” and the homebuyers tax credit were both withdrawn. The slump in house sales that followed the withdrawal of the homebuyers tax credit resulted in its reintroduction for a further 6 months - but the effect this time round is proving to be somewhat muted, with exiting house sales for July 2010 hitting a 15 year low.
And where has all this money that has been pumped into the banks ended up? Mainly in their balance sheets rather than being lent to their customers. There are a number of reasons for this.
The banks themselves have to rebuild their balance sheets to cover their losses, both actual and possible and they are also being forced to increase capital levels under new legislation. And the final reason is that their clients are borrowing less because their working capital requirements are reduced given the lower level of activity.
So, we are now beginning to see most western economies beginning to falter and this is worrying their respective governments as it raises the spectre of deflation.
Pimco, one of the worlds biggest fund managers, have carried out two detailed analyses in the last 12 months on the state of the US economy with the aim of working out how likely the US is to suffer from deflation.
First time round they calculated the chances at 10%. This time around they have calculated the chances at 25%. Quite an increase.
So why are the “powers that be” so scared of deflation?
There are a number of reasons, but the one that stands out in my mind is an almost self reinforcing economic cycle that ends up in a deflation spiral.
Consumers start saving because times are tough. This reduces consumption. Prices then come down as sellers try to stimulate demand. But consumers decide to hold off buying as they believe the goods will be cheaper next month. Sellers reduce prices further and consumers decide to delay buying yet again. So on it goes.
Okay, this is a very simplified economic model, but in many ways, it mirrors what has happened in Japan for the last two decades. It is also has a huge affect on employment which falls away as the sellers are unable to sell their goods and have to lay people off.
Japan has its lost generation of unemployed and a banking system that is still full of bad debts that should have been written off a long time ago.
So a lot to be frightened of if deflation comes to the economies of the western world, but how likely is this?
As per the Pimco’s analysis, I think the likelihood of deflation is higher than people think.
Consumers are scared. Clearly low interest rates are helping those with debts, but if economies aren’t growing and people’s jobs aren’t safe, all they will do is pay off those debts and start saving for a rainy day.
Governments have much less ammunition in their armoury than they did 12 months ago and will be unable to try and fund growth in the same aggressive way - and banks are rebuilding their broken balance sheets rather than lending.
So the alternatives seem fairly simple.
A one in four chance of deflation - or a three in four chance of growth - albeit somewhat muted for the next few years.
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
Thursday, 26 August 2010
Getting Your Money to Your Destination
by Smart Currency’s Charles Purdy.
There are a lot of advantages to using a currency company such as Smart Currency Exchange; better rates, one to one service, proactive management of currency requirements... the list goes on.
But one of the major advantages sometimes overlooked is that, as well as being experts in foreign currency, Smart Currency Exchange are also experts in transferring money. This may not seem such a big deal but getting a transfer wrong can be a hugely time consuming and frustrating experience to rectify.
The details required for transfers seem to vary from continent to continent and we have a clear understanding of what is required. If there is something unclear or lacking we would ask our client to clarify: better to get it right the first time.
Transfers of the euro have become much easier with the advent of what is called the IBAN number. This number is unique for a specific bank account and it can be checked for validity before sending the funds. The only time I have experienced a problem was when a client’s lawyer gave him a wrong but valid IBAN number. Thankfully this was realised very soon after the transfer and we were able to correct error with no loss of time.
Time is also an important element when making a transfer. The whole banking system is based on a time period of two days for transfers. The reason for this seems to be one of logistics and coordination between the banks [or am I being naïve and it is really a way for them to make more money?!]. This two day period still applies to most transfers but for the US$ and euro we can now transfer with a same day value. Needless to say there is a cost, but we absorb it – no hidden charges at Smart!
I hope the above is of help. It is the unglamorous side of the business but a key component in ensuring that clients are properly serviced.
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
There are a lot of advantages to using a currency company such as Smart Currency Exchange; better rates, one to one service, proactive management of currency requirements... the list goes on.
But one of the major advantages sometimes overlooked is that, as well as being experts in foreign currency, Smart Currency Exchange are also experts in transferring money. This may not seem such a big deal but getting a transfer wrong can be a hugely time consuming and frustrating experience to rectify.
The details required for transfers seem to vary from continent to continent and we have a clear understanding of what is required. If there is something unclear or lacking we would ask our client to clarify: better to get it right the first time.
Transfers of the euro have become much easier with the advent of what is called the IBAN number. This number is unique for a specific bank account and it can be checked for validity before sending the funds. The only time I have experienced a problem was when a client’s lawyer gave him a wrong but valid IBAN number. Thankfully this was realised very soon after the transfer and we were able to correct error with no loss of time.
Time is also an important element when making a transfer. The whole banking system is based on a time period of two days for transfers. The reason for this seems to be one of logistics and coordination between the banks [or am I being naïve and it is really a way for them to make more money?!]. This two day period still applies to most transfers but for the US$ and euro we can now transfer with a same day value. Needless to say there is a cost, but we absorb it – no hidden charges at Smart!
I hope the above is of help. It is the unglamorous side of the business but a key component in ensuring that clients are properly serviced.
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
Thursday, 19 August 2010
Can your company risk losing £1,000's?
In the last 3 months, sterling has strengthened by 10% against the US dollar, recovering from $1.45/£1 to all but hit $1.60/£1 a few weeks ago– the highest in 6 months. This equates to a 10% discount on all goods for companies that import in US dollars.
Before we take a brief look at why this has happened and what to expect over the coming months, make sure you get in touch with a currency specialist to secure the best rate possible by calling 0207 898 0500.
Over the last 18 months, the US dollar has enjoyed what is known as ‘safe haven’ status. Much like when ships head for shelter in a storm, investors have bought the US dollar in order to hold safe investments and ultimately avoid losing their money. The safest investment has been US government bonds. What happened, for example, following the collapse of Lehman Brothers, was that the US dollar strengthened and then rather strangely, when strong data started to come through, investors bought more US dollars in order to benefit from the potential interest rate hikes that better economic data brings.
However, in the last 3 months, there has been a change in how the US dollar is being bought. Following 3 quarters of positive growth, the US economy has begun to lose steam. A stalling housing market and poor employment data has caused investors to question the ‘safe haven’ status of the world’s biggest economy and recent GDP growth figures came in far worse than expected. In addition, interest rates had been widely expected to start rising later this year, but Federal Chairman Ben Bernanke made clear recently that the Federal Reserve could look to do the opposite – pump more money into the economy to add some stimulus. Not what investors wanted to hear.
In the UK, confidence was at rock bottom when the election failed to secure a majority government. Since then though, the new coalition has addressed fears over strong government with decisive action – both through the emergency budget and wide ranging spending reviews – and the financial markets have to all intents and purposes given David Cameron a stamp of approval over his plans to aggressively cut the budget deficit.
In addition, UK economic figures have impressed recently. GDP growth estimates almost doubled what had been expected, showing expansion of 1.1% in the 2nd Quarter of 2010. Industrial manufacturing and services data has also showed expansion which in turn adds to investor confidence in the UK. There is a concern however that the aggressive spending cuts will stifle growth in the next 12 months, and this has limited the pound’s upward run at $1.5999/£1 – the highest seen for 6 months.
Where now? With the psychological barrier of $1.60/£1 seen as a ceiling to further strength, there is not much scope for movement above that level in the short term without an unexpectedly positive piece of data. The bigger risk is that the optimism will fade out and the pound returns to $1.55/£1. Do what so many of our clients do and take advantage of the stronger pound, fixing in rates using forward contracts. With such huge percentage swings in exchange rates, one thing is clear: you should be outsourcing your currency requirements to a specialist to help guide you through the volatility of foreign exchange markets.
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
In the last 3 months, sterling has strengthened by 10% against the US dollar, recovering from $1.45/£1 to all but hit $1.60/£1 a few weeks ago– the highest in 6 months. This equates to a 10% discount on all goods for companies that import in US dollars.
Before we take a brief look at why this has happened and what to expect over the coming months, make sure you get in touch with a currency specialist to secure the best rate possible by calling 0207 898 0500.
Over the last 18 months, the US dollar has enjoyed what is known as ‘safe haven’ status. Much like when ships head for shelter in a storm, investors have bought the US dollar in order to hold safe investments and ultimately avoid losing their money. The safest investment has been US government bonds. What happened, for example, following the collapse of Lehman Brothers, was that the US dollar strengthened and then rather strangely, when strong data started to come through, investors bought more US dollars in order to benefit from the potential interest rate hikes that better economic data brings.
However, in the last 3 months, there has been a change in how the US dollar is being bought. Following 3 quarters of positive growth, the US economy has begun to lose steam. A stalling housing market and poor employment data has caused investors to question the ‘safe haven’ status of the world’s biggest economy and recent GDP growth figures came in far worse than expected. In addition, interest rates had been widely expected to start rising later this year, but Federal Chairman Ben Bernanke made clear recently that the Federal Reserve could look to do the opposite – pump more money into the economy to add some stimulus. Not what investors wanted to hear.
In the UK, confidence was at rock bottom when the election failed to secure a majority government. Since then though, the new coalition has addressed fears over strong government with decisive action – both through the emergency budget and wide ranging spending reviews – and the financial markets have to all intents and purposes given David Cameron a stamp of approval over his plans to aggressively cut the budget deficit.
In addition, UK economic figures have impressed recently. GDP growth estimates almost doubled what had been expected, showing expansion of 1.1% in the 2nd Quarter of 2010. Industrial manufacturing and services data has also showed expansion which in turn adds to investor confidence in the UK. There is a concern however that the aggressive spending cuts will stifle growth in the next 12 months, and this has limited the pound’s upward run at $1.5999/£1 – the highest seen for 6 months.
Where now? With the psychological barrier of $1.60/£1 seen as a ceiling to further strength, there is not much scope for movement above that level in the short term without an unexpectedly positive piece of data. The bigger risk is that the optimism will fade out and the pound returns to $1.55/£1. Do what so many of our clients do and take advantage of the stronger pound, fixing in rates using forward contracts. With such huge percentage swings in exchange rates, one thing is clear: you should be outsourcing your currency requirements to a specialist to help guide you through the volatility of foreign exchange markets.
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
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