Vive la Revolution
2017 is a critical year for European politics not to mention the triggering of Article 50 and Trump.
Wherever you stand on the political divide, if your business deals with overseas customers, suppliers or other counterparties, the sustained weakening in sterling since the Brexit referendum poses a challenge.
For some, it’s about managing potential upside: around a quarter of our clients are on the right side of the weak pound. June’s referendum accelerated an existing downward trend for sterling, so exporters and other businesses receiving cashflows in foreign currency – especially US dollars – have had some time to put strategies in place to benefit. If anything, the more pronounced moves since June have made them reluctant to hedge at current levels for fear of missing out on even better rates.
Those for whom sterling weakness is a problem face a much more serious challenge. The known unknown of the UK’s post-Brexit relations with the EU will be with us for two years at a minimum. “Good” news will of course bring rallies, but every fresh decline in the pound’s value threatens to erode profitability for any UK business needing to convert sterling in order to buy materials, pay for services or meet staff costs.
This is an inescapable risk for any company with currency exposures, but taking an active approach can minimise the consequences.
For businesses without a treasury policy, now is a good time to start considering one. This might sound formal, but really it’s about assessing a firm’s treasury exposures – currency and commodity risks, or the cost of holding large cash reserves – and ensuring that there is a policy in place.
It’s a worthwhile exercise for businesses of any size: from smaller firms where individuals or management teams juggle the challenges of leadership with those of managing currency and other risks, to enterprises big enough to have dedicated treasury officers. In the case of the latter, increased oversight from company boards is introducing a new element of personal risk in today’s volatile market. An agreed procedure means that both responsible officers and senior management are comfortable about how they are addressing the huge swings that have become the norm.
Those extreme moves are inducing some firms to depart from established treasury policies, with the aim of exploiting the fast-moving market in order to hit their budget rates – the FX rates against which they have benchmarked their cashflows. Abandoning set policies to trade big short-term moves can of course deliver commensurately big wins, but the downside can be equally meaningful. For most businesses, hitting a favourable average on currency rates over the year is often a more desirable approach than taking the speculative approach to risk.
Looking ahead, the focus will remain on sterling but there are other emerging risks. The Presidential elections in France and ongoing low growth in the Eurozone offer meaningful downside risks for the euro, which will affect UK firms dealing with the bloc. As with any developing situation likely to affect currency markets we’d advise people to ask two simple questions: How much do I know about my likely exposure, and what’s the bottom line for my company in terms of the FX rate? If you can answer those questions, we can get to the solution.
Call us to discuss your treasury risks for 2017 on: 0800 055 6339.