22/6/2011

By Mark Ackroyd

Just before the recent Royal wedding, while many were topping up their tans from the mini heatwave the UK experienced over Easter weekend, there was another reason to be cheerful: the UK first quarter GDP figures appeared. These showed us that the UK had avoided the dreaded double-dip recession. The main question that many importers will be asking is; how will this affect my business? What will it mean to my buying power? What will it mean for my customers?

The first reading of the figures reported growth at 0.5 percent; it pushed sterling higher, but not as high as most importers would have liked. Taken in conjunction with the slump over the winter, the simple fact is that growth in the UK over the past six months has been flat. This leaves both the Coalition Government and the Bank of England in a bit of a predicament. At this current stage it is hard to make the assumption that the UK will avoid going back into contraction in Q2 or Q3 this year. While government policy is uncertain, then monetary policy, and with it the value of sterling, are all still very uncertain.

With this uncertainty on currency, what can you do as an Importer?

Use tools to seek out the best exchange prices

Many businesses just rely on their bank for foreign exchange, buying as and when they need it. By going to a more sophisticated provider, you can access a range of tools which better enable you to remove any uncertainty, and make much more robust financial plans. One example of this sort of tool is an FX forward. This allows you to book currency for a date in the future based on the current rates in the markets. This would mean that you don’t have the headache of questions such as, what if the UK economy starts to falter? Or, more likely, what if other economies start to recover at a faster pace?

Draw a line in the sand

As we all know, currency markets can move very fast. If you are committed to a large foreign purchase, a sophisticated approach to currency trading can help mitigate these movements. One of the best ways to minimise your risk is by setting a Forex ceiling, and by instructing your buyer, you commit to purchasing your currency the instant that the price hits a predetermined mark. This enables you to accurately fix your maximum costs.

Look for the most price-sensitive areas of your business and work out where you’re most vulnerable

Some importers are in businesses which are very price sensitive; others are not. Especially if you are importing consumer goods, a slight variation in currency prices in the exporting country can lead to huge impact on your margin back home. This can hit you unexpectedly, especially if importing components or raw materials for a manufacturing process. You need to look at your business and work out where you could be vulnerable to currency fluctuations, and from that derive a sensible attitude to your appetite for currency risk. In some sectors, it is a risk you can afford to run, but in others you would be wise to look for an exchange solution.

Manage & balance your risk with your opportunity

With all this talk of risk, it is easy to forget there is also a potential reward. There are great bargains to be had on the currency if you are willing to watch the market; for example, Sterling is trading near its highest level against the US Dollar in 16 months. Importers only get involved in forex trading as a by-product of international trade, but it can be wise to realise that you can hugely increase your margin on certain goods by buying forex at a great rate.

Don’t speculate – especially by accident

Benefits from a sensible exchange policy usually accrue from minimising risk, not by speculating. However, many importers indulge in currency speculation without realising that they are doing it. When you go to your bank, and just buy on the day, you are, in effect, currency speculating. You’ve held off to the last possible minute, and are just turning up hoping the price will be good. Sometimes, you’ll walk away happy; sometimes not. In business, it’s almost always better to manage your risk than leave it to one side; even if a forward leaves you paying a slightly higher price, what it’s really bought you is certainty, and an ability to plan your cash-flow.