Months of casual speculation about the impact of an EU referendum have brought a period of weakness for the pound. Recently UK markets have been very jittery over the issue and sterling will remain vulnerable to political jostling between now and the end of June.
Adding considerable fuel to the fire was Boris Johnson's announcement that he would be standing on the other side of the fence to his party leader on the issue. His pro-Brexit standpoint had a dramatic impact on Monday's market. The pound slumped by a staggering 2% on the day, the lowest in 7 years against the dollar and the biggest one day fall since Cameron came to power in 2010.
Boris' decision to position himself against Cameron has confirmed many peoples fear that the referendum is far from definite in either direction. It is this type of insecurity that facilitates market tremors and causes such considerable rumbles as early this week. Despite markets expected to stabilise, the element of uncertainty is set to be a fixture in coming months.
Small and medium-sized businesses are the lifeblood of our increasingly interconnected global economy and those trading internationally remain most exposed to currency moves. These companies should brace themselves for a tumultuous few months. The main issues will be for importers and exporters dealing with these fluctuations - particularly when it comes to trading with our main partner, Europe. UK importers have been through the ringer in the last year already, having had to endure a 10% deterioration in sterling levels since the end of 2015; the prospect of now wearing further losses is unthinkable. As a result, many directors, FDs and corporate treasurers have to make the difficult decision between protecting against further Brexit-driven downside or accepting the risk in order to wait for a recovery. Simple products like Flexible Forwards or Orders become vital tools in this process, with the aim being able to continue trading as normally as possible regardless of the outcome.
Some companies made snap decisions on Monday last and quickly entered the market to avoid further losses by fixing upcoming dollar and euro payments at the day's levels. SME exporters on the other hand have been wrestling with the decision of whether to fix at current attractive levels or to wait for further Brexit uncertainty to improve their profit margins.
As is so often the case, there is no ‘right' answer. It really becomes a question of finding a strategy that works for the business and protects the core activity from currency volatility. This is a market in which proactivity is rewarded and the best advice is generally to avoid doing nothing. Understanding the company's exposure and being realistic about the impact of currency moves is the first step.
It is a difficult decision because fixing the currency in advance can mean missing out on potentially positive moves, but certainty allows for peace of mind and accurate business forecasting. Not to be underestimated!
Difficult as it is to see past the EU Referendum, the underlying picture for the UK is not all doom and gloom. Market consensus is that the next policy change from the UK will be an interest rate hike and comparing UK economic data to that of the US or Europe reflects very well on the domestic economy. The challenge is getting through the media ‘noise' and market turmoil during this period of heightened uncertainty. Regardless of which side of the market companies fall on, it is possible to navigate the turbulent path ahead.
Richard de Meo is MD and founder of Foenix Partners [1], an award-winning corporate forex company.