Comment: Minimise your exposure to sterling’s volatility

Comment: Minimise your exposure to sterling’s volatility
By Reece Dye, business development manager at UKForex

It’s been a very volatile period in foreign exchange markets over the last few months. The pound fell sharply following the surprise vote on Brexit in June and it’s continued to come under severe pressure ever since, as negative headlines on the subject dominate the newswires. The pound is near to 35 year lows versus the dollar and at or near to record lows against a range of other currencies.

More broadly, the weak pound has squeezed profit margins of UK importers that hadn’t sought adequate currency protection ahead of the vote, and at the same time, made the landscape a lot more attractive for UK exporters.

As far as the travel industry is concerned, the effect of the weaker pound has meant there's been an increased demand for UK inbound travel, particularly so from Germany.

Those companies with a traditional UK customer base are now concentrating their advertising efforts on such markets. Some businesses are even turning their attention towards ‘holidays at home’ and focusing their marketing spend on destinations such as Devon and Cornwall.

Until these companies have had a real chance to adapt though, the fall in demand for foreign travel from the UK means profit margins are being squeezed, and it’s hurting.

Some airlines are cutting routes to and from the UK as they anticipate lower business demand, a consequence of the perceived impact that Brexit will have on the UK economy rather than the effect of the pound.

Tax and fuel costs impact airline profits more than currency fluctuations but the weak pound is still and should be a serious consideration for UK airlines with the price of oil being denominated in US dollars. There’s more of an indirect impact of a weaker pound to take account of here.

The future for the pound remains uncertain too with a host of huge financial market events on the way that could yet still decide the currency’s longer term fate, including the US election result, the US Federal Reserve’s decision on monetary policy in December and any conclusion to the UK government’s negotiations with the EU on Brexit and the triggering of Article 50.

This uncertainty makes it increasingly difficult for travel companies to manage or at least best decide on how to manage their foreign exchange exposures and incoming or outgoing international payments.

This uncertainty in financial markets doesn’t look like passing at any time soon and there are various ways, depending on your appetite for risk, that you as a travel business can manage your currency payments.

Firstly, it pays to stay informed. Most SMEs don’t have access to treasury departments at their bank. With a currency broker you can get connected to a currency specialist who will provide you with a comprehensive update on the latest moves in foreign exchange markets.

Secondly, plan ahead and build a strategy. Depending on the amount and frequency of your currency conversions, it’s worthwhile developing a currency strategy that is tailored to your business needs. There are a few currency management tools available including:

Forward contracts
Using a forward contract you can lock in your rate now and deliver your funds at a later date. If you can estimate how much your business will send or receive in foreign currency over the year, you can lock in a single rate now for the full amount. Doing this will protect you against any depreciation in the value of the currency you are holding.

Limit Orders
With a limit order you can set a more favourable exchange rate and the funds will be automatically purchased on your behalf if and when the rate is reached. Limit orders are ideal for ‘having the market come to you’.

Meet risk halfway
Mix it up with spot transactions (standard immediate transfers), forward contracts and limit orders. For example, if you don’t feel like putting all your eggs in one basket with a long dated forward contract, lock in half your yearly exchange requirements with a forward contract and you’ll be free to use spot rates or limit orders throughout the year if and when the rate does improve.

One of our more established client’s, a specialist in the over 50s travel market, is taking a more varied approach. With a predominantly UK customer base and an annual foreign exchange exposure of approximately two million euros per year, they are taking advantage of any spikes in GBP that does occur, and generally hedging EUR 200k at a time with forward contracts. This allows them to ‘average out’ their exchange rate through the year. It means they were able to take advantage of the recent rally in the pound following the High Court ruling on Brexit and their thinking is that there will be other opportunities for pound spikes throughout next year. They are using limit orders as a means of making the most of these periods.

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