Jake Trask, FX research director at international payments company OFX, says locking in exchange rates could be one way to protect your business against the uncertainties caused by Brexit
This article is the view of the author and not necessarily of Ready for Brexit
In 2016, Britain’s shock decision to exit the European Union triggered volatile exchange rates that made it difficult to maintain a clear view of the impact Brexit would have on the currency market. During the period of negotiation that followed, this uncertainty has not disappeared, but Britain has proved it is still open for business, pushing ahead with international sales. The pound, meanwhile, has regained some value, but is still down against both the euro and the dollar when compared to pre-referendum rates.
The need for international payments will not disappear and SMEs will continue to import and export despite the ongoing Brexit uncertainty. But what will the different Brexit outcomes really mean, and how can you protect your business from the impact?
A soft exit from Europe has always been favoured by the UK finance market. Keeping Britain closely aligned with the EU will minimise disruptions to trade, which is an obvious priority for many UK businesses. With 45% of SMEs choosing Western Europe as their favoured export market in a recent OFX survey, the value of easy access to Europe’s trade and talent potential is clear.
The recent Chequers agreement proposed Theresa May’s purest vision for a soft Brexit and was welcomed by many of the UK’s largest business associations. The result? The pound hit monthly highs against the dollar and confidence was up for businesses across the UK.
Staying in the European Single Market would allow UK businesses to continue to trade tariff-free so the impact on international payments would be minimal as trading continues ‘as normal.’
A hard Brexit is a little more complicated. If the UK leaves the EU single market entirely, it will need to forge a new relationship with Europe based initially on World Trade Organisation rules.
There are both pros and cons to a hard Brexit. Sterling seems to react to any uncertainty in the market by devaluing sharply, which explains the fluctuation the pound has demonstrated over the past two years. Investors who buy large amounts of currency typically stop doing so when the future value of a currency is unsure, making the pound a less attractive proposition.
On the other hand, a weak pound, synonymous with a hard Brexit, could make overseas trade more attractive for British exporters. A weakened pound makes British products more appealing to foreign buyers, as sterling denominated goods become relatively more affordable.
However, with uncertainty about how far the pound may fall, businesses need to think carefully about the timing of international payments to make sure they’re getting the best rates and the best outcome.
Deal or no deal?
Forecasting for a ‘no deal’ Brexit is even more difficult as this scenario could take several different forms. Many consider a ‘no deal’ Brexit to be damaging for both Europe and the UK. IMF analysts have suggested that the EU could lose up to 1.5% of GDP from a ‘no-deal’ Brexit while the UK would take an even bigger hit of 4%.
A no deal Brexit will revoke the possibility of a two-year transition period following the UK’s exit from the EU in March 2019. Losing this will mean losing the time for new trade arrangements to be put into place, leaving businesses in the lurch and potentially reducing their appetite for international business.
The outcome of leaving without a deal could sit somewhere between soft and hard Brexit and the impact on the pound could be devastating, but only time will tell.
Protecting against potential Brexit fallout
With such uncertainty about the Brexit deal, businesses should take measures to protect themselves against potential consequences. One way to do this is to lock in favourable exchange rates for a future date. Setting up a forward contract will protect you against foreign exchange volatility and will allow you to plan your international payment costs in advance and budget accordingly.
Hedging a portion of your overseas earnings eliminates the financial risk associated with uncertain exchange rates and will protect your business from any change in the value of sterling, which could be the difference between sailing through Brexit and barely getting by.
A specialist payments provider is the best way to find the most competitive rates and can offer advice on the best way to manage your payments alongside these advanced currency tools.
Business as usual
There is much anticipation about how leaving the EU will affect UK businesses as they continue to trade internationally. Following the Brexit decision and the increased volatility in exchange rates, international transfers were almost immediately impacted. But despite exiting the EU, it seems UK businesses remain upbeat about international trade, with 62% saying they feel confident about doing business overseas. So trade will continue with foreign markets in one way or another; and, by capitalising on the export opportunities that may be opened by a weaker pound, the need for efficient and secure international payments is likely to increase.
While Brexit negotiations slowly unwind, UK companies must continue with business as usual, protecting their payments from uncertainty as best they can and ensuring they sail through Brexit regardless of the outcome.