How do foreign exchange rate fluctuations affect your business?
Businesses with international dealings could improve their bottom line by taking a proactive approach to exchange rate movements
If you have a business which prides itself on sourcing local products, foreign exchange is unlikely to have much of an impact on your profit margins. But if your business sources goods and services from overseas, exports products or manages foreign investments, fluctuations in the currency market can make a notable difference to its profitability.
So what do we mean by foreign exchange rate fluctuations?
The foreign currency market is one of the most volatile trading platforms in the world, and exchange rates can move by as much as 10% in a matter of days.
For example, in 2014 the Pound Sterling to Euro (GBP/EUR) exchange rate moved between lows of 1.1913 and highs of 1.2872.
Similarly, the Pound Sterling to US Dollar (GBP/USD) currency pair brushed a high of 1.7160 that year and also tumbled to a low of 1.5578.
Even small fluctuations in an exchange rate can mean you get less of a return on your exchange.
Let’s take the GBP/EUR movement outlined above as an example… If your business imports goods on a monthly basis, £5,000 would have secured you €5,956.5 to spend on produce when the GBP/EUR pairing was at its lowest point, but €6,436 to spend when the market was stronger – a difference of €479.5.
Businesses with regular international money transfers to manage could find themselves seriously out of pocket if they fail to capitalise on positive foreign exchange rate fluctuations or leave themselves exposed to negative ones.
Currency movements are dictated by many things, making predicting the direction an exchange rate will take particularly tricky. However, some experts say you can pre-empt market fluctuations to a certain extent by being aware of key economic events (such as the release of growth, employment and inflation reports) and monitoring commodity shifts.
That being said, further exchange rate instability can come in the form of geopolitical tensions. If, for example, your business requires the trading of Sterling for the Australian Dollar (GBP/AUD), a factor known as ‘risk aversion’ can affect how many ‘Aussies’ you get for your Pounds. The Australian Dollar is considered a ‘higher risk’ currency and as world conflicts and geopolitical tensions cause trader risk appetite to dampen, events of this sort can weaken the Australian Dollar – meaning you’ll get more for your money.
So, should your business require iron ore from Australia at a time when geopolitical tensions (such as an escalation of ISIS concerns) have caused the Australian Dollar to decline, you could get more iron ore for your Pounds. Conversely, if the conflict was resolved and the ‘Aussie’ advanced due to increased demand for high-yielding assets, iron ore would become more expensive to purchase.
So how do you safeguard your business against a dramatic currency fluctuation?
It’s impossible to predict exactly how an exchange rate might move, but with expert support and guidance your business could take a proactive approach to managing foreign currency exchange requirements and limit your exposure to risk.
To that end, currency brokers can offer your business access to a service by which you can fix a favourable exchange rate for up to two years in advance of a trade. So if you know you’ll need to purchase Australian iron ore in the future, it would be sensible to fix the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate whilst the ‘Aussie’ is in a position of weakness.
In so doing, you’ll know exactly how many Australian Dollars you’ll get for your Pounds and can budget effectively. The disadvantage of such a move, however, is the possibility that you could fix your rate too early and miss out on a more significant Australian Dollar declination.
Managing regular overseas payments, like a foreign payroll or recurrent import/export costs, can also be more advantageous when you use a broker. Unlike many banks, brokers don’t charge transfer fees or commission costs and can secure you a more competitive exchange rate.
As highlighted above, currency fluctuations can have a marked impact on the profitability of a business with foreign exchange requirements. Market movements and trends can be tracked to a certain extent, but many varied influences, including geopolitics and commodity fluctuations, can change the rate you’re able to secure. If you want to protect your business’ bottom line, it’s recommended that you seek expert advice regarding safe-guarding your transactions against foreign currency fluctuations.