Brexit created a whole host of risks for Clear Treasury’s sterling clients. In recent months another major risk has been thrown in the mix – the impact of the coronavirus on global economic markets. Consequently, we saw a fresh explosion in currency volatility too. For example, in the month of March alone, sterling fell by over 10% to the euro in its high to low rollercoaster range. For this currency pair and many others, it will prove to be another tricky time for companies when planning ahead. In Clear Treasury, our approach to working with our clients has always been consistent and clear as to how a company should approach their currency risk: Identify; Assess; Implement; Review.
Whilst we’re all living in remarkable and worrying times, for us at Clear Treasury, Foreign Exchange (FX) markets too have been remarkable and we appreciate it can be a stressful time for our clients. With more stresses in the economy now inevitable and the risk of more extreme currency markets, the normal currency hedging rules are as important as ever albeit companies need to be fully aware of all the potential risks.
Managing the Risk
Have you considered fixing your future rates of currency exchange? For many of our clients, the last number of years has been a tricky period when it comes to making the right currency hedge decision.
For example, sterling fell by nearly 13% against the US Dollar over a 10-day period of March 10th to March 20th. This brief period included the single largest day fall for the pound since the shock Brexit referendum result and from an historic perspective, hitting its lowest level since 1985. Remarkable!
From a hedging perspective, the simplest way of creating certainty in your future rates of exchange, is to use a Forward Contract.
- A forward contract lets you fix a price today for a foreign exchange in the future.
- The forward rate is the exchange rate you set for an exchange that will happen on an agreed date eg in 3 months’ time.
- The settlement date is the day you get your currency.
- You may see it called a forward FX trade (the FX means foreign exchange) or forward transfer.
Review
The forward contract hedging approach is one we have always adopted with a note of caution, with that cautionary note now more important than ever. If hedging 100% of your future expected exposures, are you aware of the additional financial and credit risk you may be creating too? We at Clear Treasury would always stress test such scenarios with our clients at the outset.
The Future is in Our Partnership
The financial landscape is changing. Government plans are encouraging SME lending so they can more easily export their goods and services after Brexit, and alternative providers are challenging banks with their own SME credit, funding and foreign exchange solutions.
Taking on debt is often a necessary step for many businesses on the road to significant growth, but they can be restricted by banks refusing to increase their trade finance or offer overdrafts or short-term loans. This can lead to insufficient working capital and an inability to secure necessary funding. Diversifying your financial resources can be a sensible safeguard towards long-term stability.
We’ve partnered with Accelerated Payments to provide individual invoice finance in the UK and Irish markets. Our joint aim is to help as many SME as possible alleviate credit and financial risk and the inevitable stress associated when trading in overseas markets. By using their individual invoice finance product with our foreign exchange expert service, you can manage both your cash flow to help smooth working capital requirements and remove the risk of non-payment as well as minimising the risk for specific overseas transactions. We’ll work with you to make growing in new markets as stress free as possible.
About Clear Treasury
Clear Treasury is a FCA regulated financial services company based in the UK and Ireland, offering client specific foreign exchange and treasury solutions to Corporates, Financial Institutions and Private Clients. Contact Clear Treasury at [email protected]
