Jake Trask, FX Research Director at OFX, explains how British SMEs could be affected by changing currency conditions as the markets react to European politics – and how to prepare for them ahead of time.
The euro has endured much of late, but though the French Presidential election may be drawing to a conclusion, the signs suggest that things aren’t set to ease off for the single currency just yet. With everything from Greek bailout talks to the German elections set to hit in the next twelve months, there will be plenty for British businesses to watch out for when dealing with Europe.
Macron and Le Pen are now going head to head in the battle for French presidency, and at the time of writing, pollsters are predicting a Macron victory with relative confidence. One might be tempted to assume that only a Le Pen win could affect the euro and make life difficult for British businesses. In truth, however, a Macron victory could also have knock-on effects, so it pays to be prepared.
As this particular political saga draws to a close, businesses should also start looking further ahead, preparing themselves for further developments that could knock the euro.
Could you be affected?
For most British businesses, European politics can feel remote and largely irrelevant. It’s an easy assumption to make – but for any SME trading with Europe, it’s also misleading.
Should Macron win the French election, for example, the euro is likely to strengthen as the risk of ‘Frexit’ is dissipated. That’s good news for British exporters, but less ideal for importers from Europe.
If your business imports from Europe, a stronger euro would mean higher costs, which could affect your bottom line. But if you’re exporting to the continent, this is exactly the scenario you’re looking for. As the euro strengthens against the pound, your European customers will have greater purchasing power and be able to snap up more of your goods priced in sterling – perfect, if you’re looking to increase sales.
If you trade with European countries but aren’t sure how you could be affected, it’s best to consult an expert who can take a look at your individual business circumstances and decide whether you’d benefit from a currency strategy.
Keep up on current affairs
As France decides its future, it’s important to keep an eye on future European events that could upset the Eurozone in the year to come. With Greece entering bailout talks and the Germans taking to the polls in September, the euro won’t be completely ‘risk free’, even if Le Pen does lose the French presidency.
If 2016 taught us anything, it’s that polls shouldn’t be taken as gospel. Trump and Brexit demonstrate that a Le Pen presidency should still be considered a potential option. Should her ratings nudge into the mid 40s, a weakening of the single currency is likely to occur. As a result, small business owners should keep an eye out for any closing of the gap between the two candidates in the polls.
Uncertainty of any kind could destabilise the euro, providing SMEs with the opportunity to hedge euro exposure via a forward contract for later in the year, locking in the currency at a weak point against the pound. This would be particularly useful for British importers, for whom a strong euro would make life difficult.
The complex web of international politics can be a tricky to navigate, but there are ways to get some coveted peace of mind – at least when it comes to currency.
Get on track with a trusted partner
The current political situation is intricate and uncertain in both Europe and the UK, and as it unfolds, it will continue to affect the currency markets. As a result, it’s worth seeking the support of a specialist currency partner to guide you through it – unlike your bank, you’ll get a tailored service that responds to your company’s needs, as well as support in developing a strong currency strategy. Of course, selecting the right partnership will require some research up front. Be sure to compare specialist providers on their fees, rates and customer service, to help you make an educated decision.
Should you decide to set up a currency strategy, an expert will talk you through the options, which could include a combination of forward contracts, limit orders and spot trades.
Forward contracts allow you to purchase foreign currency at the present rate, and agree to receive the funds at some stage in the future – a good way to shield yourself against any future volatility that could have repercussions for your company. As mentioned, it could be smart to lock in the exchange rate at a moment of particular volatility – for instance, if Le Pen surges in the polls. For importers looking to profit from a weak euro, this can be the best way to protect against a future rebound in the single currency.
Most likely, an expert will recommend that you bundle your currency strategy, so it also includes limit orders and spot trades. This helps to spread risk, by leaving the door open for unexpected movements in the market. Limit orders enable you to wait for today’s exchange rate to improve – you nominate an exchange rate, and your funds are automatically transferred once it’s reached by the market. Spot trades, meanwhile, are made on the day at the current exchange rate.
Prepare now, and prosper
When it comes to European politics, there’s plenty for businesses to look out for this year.
While it’s of course tempting to assume we’ll see no further shocks to the market, the reality is less certain. A strong currency strategy can put you in good stead for all eventualities and set you up to succeed, whatever happens.
Jake Trask is FX Research Director at OFX, an international payments company.