Friday 22 September 2017

Rattled by shaky currencies?

THINGS have been calm. A little too calm. Even dramatic regime change in France and Greece and austerity rebellion in -- gasp -- Germany left global currency markets largely unmoved. As they have been most of this year.

Last year the forex markets saw more ups and downs than a seesaw. But fiscal treaty uncertainty, Spain bailing out one of its biggest banks after swearing it wouldn't need to, and not great US figures are upping the ante for a return to currency wobbles.

Currency volatility affects your business if you're in import/export. If the euro went under, things would get even more interesting. An incredible 95 per cent of Irish companies operating in overseas markets have no currency strategy, says the Irish Exporters' Association (IEA) and UCD figures. Only 6 per cent have made plans for a euro collapse.

The study calculates that, on €1m of export goods or services there is an exposure of around 3.25 per cent, or €32,500 a year. In uncertain markets, that can leap to 10 per cent, or over €100,000 in exposure -- a potential profits wipe-out scenario. There are several things you could consider.

Natural hedging

There are lots of fancy-assed derivatives, swap and options products you can try if you want to play with currency and try and win an advantage. However, it can be a dangerous game if you're not a currency hedge fund specialist (and then even if you are).

If you trade in sterling, hold sterling, if you trade in dollars, hold dollars and so on. "If you have to sell in sterling, then try and buy as much sterling as you can," John Whelan of the IEA recommends. Sounds simple, but most companies don't do it.

Peer-to-peer currency hedging

This has become an increasingly popular way to beat forex rates. "About a quarter of our clients are SMEs, such as car importers" says Brett Meyers, MD of Dublin-based Currency Fair, which trades over 15 currencies and is regulated by the Central Bank.

"We have businesses saving tens of thousands a year," he claims. "Our rates are pretty close to the interbank rates, whereas banks' fees can be 2 or 3 per cent over that. Ours generally is no worse than half a per cent and often better than interbank rate."

Fuel hedging

Even though crude oil demand has fallen, it's higher than in 2008 and still growing in Asia. Prices are likely to remain under pressure. As with currency, you can fix the price you pay for fuel costs for three months to a year. "We work clients to find a plausible hedge to suit their business," says Alan Harrison of Investec's treasury solutions team.

A bus company, a haulier, an air cargo business might want to manage these costs to keep balance sheets stable.

"You are taking a risk that the price won't go lower," says Harrison, "that's why we analyse the client's balance sheet, exposures and budget rates and if they lock in at a certain price how it affects them -- we go into a lot of detail."

Forex accounts

The most common reason for companies to have foreign currency accounts is to save on exchange rates by having accounts in the currency of countries you do business in (ie the natural hedging option above). But it can also be part of a more sophisticated currency strategy.

Few firms have much cash these days, but if you had funds earmarked perhaps for investment, or from the sale of an asset that you're waiting to reinvest, you may want to diversify it to hedge against the risk of a euro break-up.

"Some companies we're working with are looking at diversifying their resources and taking some market risk away from bank deposits," says financial adviser Vincent Digby of Impartial. "You need something that protects against blow up of the euro and has facility to allow a switch to different currencies, with no exit penalties." He suggests that 25-35 per cent of your cash could be managed in this way, "with balance between security and return".

Advisers such as Irishdeposits.ie, Impartial.ie and specialist bank Investec provide currency management strategies, while most financial institutions offer foreign currency accounts.

Currency hedging

This involves buying dollars, sterling, etc, at a price that is locked in for months ahead. The main banks provide the service as well as treasury specialists. Depending on your credit rating, you may be allowed a credit line to 'forward buy' currency and hedge against exposure.

But couldn't you lose? "The idea is that you don't," says Whelan. "Sterling has been falling since January and some would say if you hadn't fixed you'd be better off, but what you should say is: 'I'm in business to trade, I'm not expecting to gain, though I don't want to make a loss.' The hedging protects against loss but you won't necessarily profit from it. Don't seek to play the currency market game as well as your own sales game," he advises.

Whelan says companies are having trouble getting the buying-forward currency. "Some banks would take that as a loan requirement, clamping down on your overdraft facility or asking you to put in a back-to-back loan facility, so it's effectively taking away cash flow."

Increased competition from Investec and others is helping. "Companies can and should go to these smaller institutions and get a better rate," says Whelan.

Shop around

Get at least two sources for quotes when buying or selling currency-- there are major variations in rate.

"There are quite a number of organisations out there that specialise in forex transaction, that's their main business," says Whelan. Even if you feel tied to your bank to keep them sweet on other services, you can quote competition rates from Blue Fx, Investec and others to haggle for a better deal.

Optimum netting/pooling

If you're selling into one market in euros, another in sterling and another in say, dollars, and then maybe buying from any of these markets, optimum pooling is a way of offsetting currency losses and avoiding transaction fees.

"Quite a few firms do it," Whelan says. "Check between all payments whether you can net one off against another and save on exposure and transaction costs."

Factor forex into pricing. "Have clear guidelines for sales, purchasing and accounting departments on currency plans. All should be singing off the same hymn sheet. A lot of companies are asking UK customers to accept euros. We would encourage firms to push clients to trade in euros," he adds.

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