Capitalising on currency fluctuations to trade overseas
UK businesses have a great foreign trade opportunity in 2012 if they hedge against volatility, argues Stewart Blake
The Euro Zone debt crisis doesn’t look like it is going to be fixed anytime soon. Yet, despite the doom and gloom, there is still cause for optimism. The current global economy is providing a great deal of opportunity to small businesses in the UK, particularly those importing and exporting. Business owners must not however become complacent as volatility is still rife.
For small businesses in the UK, it would be prudent to examine exposure risks when looking at enhancing export capabilities, especially in light of the volatility of the currency markets for Q3 and Q4 of last year.
The moves seen on GBP/EUR could be quite harmful to a business’s bottom line; during the final two quarters of 2011 there was a move of 10%. This is not as dramatic a move as was seen in the second half of 2008, in a 6 month period the markets saw GBP/USD move by over 33%.
Given the well-publicised economic headwind the global economy is facing it is far too risky for SMEs to delay trading until the day your currency is needed. There are plenty of tools such as forward trades and options that can help hedge against the uncertain swings we have been seeing and any business looking to import or export should employ these.
2012 could be a year of vicissitudes for Sterling, if export focus lies in the Euro area and US dollar denominated regions. It is likely that Sterling will remain strong against the Euro, which means exports to Europe will become less attractive. Companies that have factories in Europe or are paid in Euros will also find the cost of repatriations increasing.
In contrast, the US Dollar looks set to strengthen. This is based on several factors, the demand for the safe haven asset, reserve currency flows from Euro to US Dollar and improving economic condition, leading to early changes in interest rates. All of which makes export to US Dollar denominated nations an attractive prospect.
Perhaps then, SMEs can take heart in one of the measures recently announced by David Cameron; the pledge of a £95m investment. In his announcement, Cameron stressed the importance of businesses taking opportunities in export to get the UK out of recession.
This investment is facilitated by three high street banks, RBS, NatWest and HSBC which demonstrates in some way, their commitment to contributing to growth despite any bail-out. Small businesses will be able to access the funding through the banks’ regional networks. The scheme will be administered in the form of grants and will go towards sustaining viable businesses, supporting growing business and creating jobs.
While the government’s pledge is nominal, it is still a step in the right direction. The UK needs to rebalance its economy away from finance, real estate and construction. By doing so it will provide protection for the British economy should the global economy experience the shock we have seen in the last few years.
However, this is a much bigger challenge than just focusing on businesses taking the reins. Other issues need to be tackled such as the skills of the workforce and infrastructure to name but a few. The government’s pledge is the first step on a long road to diversify the business model in the UK.