Foreign exchange volatility: some considerations for exporters

The findings of our recent Quarterly Economic Survey (Quarter 3) draws out the emerging issue of exchange rate volatility on businesses within our region. The fieldwork finished just before the Truss/Kwarteng mini-budget triggered the major movements of sterling against major currencies – especially the US dollar. Exchange rates concerned 26% of respondents in Q3, double the rate in Q2. Amongst businesses who said they exported to international markets the jump was even starker – 42% in Q3 up from 23% in Q2.

Volatility in the comparative strength of the pound exacerbates other areas of risk for businesses trading internationally – stoking inflation, increasing uncertainty about margins and prices, and impairing investment decision-making given recent declines in business confidence.

Issues to consider for businesses trading internationally

Whilst all businesses will be affected differently by foreign exchange risk a few popular considerations emerge:

• Quantifying the degree to exposure on imported goods and services and how material movements can be for your margins and cash flow. How much forex (foreign exchange) movement can occur before the contribution to overheads is reduced to zero? What’s the gross operating margin on a particular product line? What about cashflow impacts where the forex price exceeds liquid capital without requiring a drawdown of investments and/or taking on additional credit lines.
• Strategies to hedge or defray some of the exchange rate risk. Whilst only the most exposed businesses engaged in international trades will be considering formal hedging strategies through their banking provider there are options for smaller businesses worth considering:

1. Opening on overseas bank account in currencies most exposure is denominated in.
2. Set payment terms in advance at an agreed future sterling equivalent price. 
3. Making payments in a mix of currencies e.g. deposit denominated in GBP and the remainder in the foreign currency of the supplier or customer.
4. Explore the possibility of spreading payments on account if the purchases must be in foreign currency to avoid adverse FX spot prices on one day 
   
   

Conclusions

A weakening pound should provide some upside benefit to exporters as this makes their products more price competitive in overseas markets – assuming that the advantage isn’t eroded by higher relative costs of imports and that there is demand elasticity for these exports. Foreign exchange volatility is expected to continue to provide additional challenges to customers trading internationally – for more information and support visit Export your Business | Business West.