2016 has been full of surprises. Brexit and Trump defied predictions, leading to an uncertain economic outlook – we’ve already seen currency markets reacting to these political changes, and further economic impacts could still lie ahead.
Uncertainty always brings both risks and opportunities for businesses. Having a robust strategy in place will help protect SMEs from any negative effects, and leave them well-placed to exploit any opportunities that might arise.
Political uncertainty can be a business opportunity
The impact of Brexit on the pound raised alarm bells in Autumn, when price increases became headline news as Tesco and Unilever battled over costs. Businesses across Britain have faced similar issues, with supply chains bearing the brunt of rising prices.
On the other hand, a falling pound has been welcomed by others, and created opportunities for many British businesses. For exporters, a weaker pound is helping to boost demand from overseas buyers.
Likewise, those with the foresight to have secured forward currency contracts ahead of the EU Referendum are now enjoying the fruits of their far-sightedness.
An international perspective
Beyond Britain’s borders, Trump’s shock victory took the world by surprise in 2016. It’s still too early to predict how this will affect markets in 2017, but central banks will certainly be watching and waiting.
Within Europe, France and Germany will also hold elections in 2017, with the outcomes potentially hitting the euro. The UK’s negotiating position in regards to a strong Brexit deal may also be affected by the results, if the eurozone finds itself grappling with fresh uncertainty.
However, whatever the global outlook, British businesses trading with Europe and the US can move smoothly through this unchartered territory by preparing for possible currency fluctuations in advance.
Planning for 2017
Though it’s impossible to assert total control, businesses can mitigate the risk of operating in unpredictable times by managing their exposure to currency risk. A strong foreign exchange strategy can act as a buffer against changing exchange rates, protecting your bottom line from major market moves.
Joining forces with a specialist foreign exchange partner will provide you with more competitive rates and a stronger service than that offered by your bank, which will typically also charge you for international payments. Pricing models change from company to company, so do your research and check the small print before choosing a specialist.
Other factors, like transaction costs, sign-up fees and monthly subscriptions could impact on your returns, so plan for them up-front to ward off any unwanted surprises.
Tools of the trade
You should also make sure you are familiar with three basic tools that will be offered by a specialist foreign exchange partner, to help you manage currency risk and boost profits: forward contracts, limit orders and spot trades.
Forward contracts, where businesses lock in today’s exchange rate for future transfers, is ideal for defending your business against unexpected moves in the markets. This particularly valuable in times of uncertainty.
In addition, limit orders offer the opportunity to nominate a preferred exchange rate. When this is reached, your funds will be automatically transferred, offering you flexibility and the chance to capitalise on market fluctuation.
Lastly, spot trades, made on the day and at the present exchange rate, can be used in combination with forward contracts and limit orders. Depending on your willingness to engage with risk, you could reserve some money to be transferred in this way, so you don’t lose out if the rate moves in your favour.
Prepare to succeed
The paradox of 2017 is that it is certain to provide uncertainty. A strong currency strategy will be invaluable for navigating the coming year and its challenges, and of course, staying on top of the news agenda will be vital to success.
Originally posted @ Minute Hack
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