By Jason Gaywood, Director at HiFX
The frailties of market sentiment can seldom be better illustrated than by Foreign Exchange. Almost purely driven by speculation, the currency market ‘bets’ over USD 4 trillion each day on nothing more scientific than the change in relative strength of one currency unit over that of another.
Economic, technical, political and psychological factors all conspire to influence traders and push values up or down on a second by second basis 24 hours a day.
Against this backdrop of unending uncertainty, it is no surprise that the relative wellbeing or value of the Pound over the Euro has see-sawed by nearly 10% in the last six months alone.
From a four year high of nearly 1.2900 back in July, amid very real fears of a Greek default and exit from the Euro causing a domino effect throughout the Southern States, to a recent low of around 1.1620 as the fickle nature of both the financial markets and the Press refocus their attention on the UK as we lurch towards the possibility of a ‘triple-dip’ recession.
Last week’s poor UK GDP data mean that many dealers now believe that we are likely to re-enter technical recession at the beginning of April. Coupled with improving sentiment in the Eurozone, many are now selling Sterling and buying the Euro which has the self-fulfilling effect of further weakening the Pound and strengthening the Euro even more so in the coming weeks. A similar situation exists with regards to the US Dollar and all our other major trade partners.
Whilst this represents a good opportunity for UK exporters to sell their goods at a discount to their overseas competitors, it will also likely cause an increasing headache for the vast majority of British businesses who import from the EU or the Far East. If a 10% increase in import costs is viewed in the context of its effect on already pressured net profit margins, the need for effective currency risk management becomes all the more apparent.
Whilst CFOs and FDs might view currency forecasting with healthy scepticism, they would be well advised to employ the expert services of a reputable Foreign Exchange specialist in order to allow them to make more informed and timely decisions with regard to what, where and how to hedge the risk they face by trading internationally.
For example, the use of Forward Contracts, Market Orders, averaging strategies and other simple tools together with on hand expertise can avail a busy treasury function with the ability to make more informed and objective decisions about how to mitigate FX risk.
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