Sterling has appreciated over the last 12 months by an average of 12% against the other dozen most actively-traded currencies. It has gained about 13% against the dollar and about 10% against the euro. Against emerging market currencies, the rise has been even more dramatic, with the pound surging 24% against the Turkish lira.
This was good news for Brits jetting off to the beaches of the Mediterranean this summer, because their pounds bought them more euros than they did a year ago. The same goes for travellers to the US, given that the pound is trading at its highest level in five years against the dollar.
However profit warnings from UK companies have hit a three-year high despite the improving economy, with the strong pound a growing problem for businesses with overseas operations.
As a number of major companies, including Rolls-Royce, BAE Systems, GKN and Diageo, prepare to reveal the impact of sterling‘s recent rise on their profits, a report released recently shows adverse currency movements triggered more than a fifth of profit warnings in the first half of 2014, compared with just 3% last year. The world’s biggest advertising group, WPP, has said it faced “strong currency headwinds” in the first half of 2014. It reported a 1.5% rise in headline pre-tax profit to £532m ($882m), but when currency movements were stripped out the rise was 15.6%.
Are fluctuating currencies a threat, an opportunity or an irrelevance for BearingNet members?
Theoretically our UK customers should be benefitting from cheaper imports which they can sell in their own market at a better margin, but suffering because prices are higher for exports. The reverse would apply to our Eurozone and USA customers.
Of course nothing is ever that simple. Many factors impact on prices and the margins for bearing distributors in addition to how much overseas business they do – for instance how much inventory they are holding, and how easily customers can obtain the required products elsewhere.
A crystal ball comes in handy when trying to predict currency movements. There is always plenty of speculation about how currencies may move, but no one can be sure.
“try and target currencies where the prediction is for that country to be in a weak currency cycle” – BearingNet Member
Some firms opt to invest in inventory as a means of locking in prices and currency valuations. If you are able to stock up from overseas suppliers when other currencies are weak, prices can be maintained and margins increased.
“In times of our market having a strong dollar we import as much as possible and when it’s weak we try and buy the same product more in the local domestic market”
Many of those who do a lot of overseas trade run a number of different currency accounts so they can buy and sell in the same currencies. The currency gain or loss only materialises when you convert to our own currency. If you don’t have to convert your foreign currency immediately you can bide your time and wait for a better rate (if you’re waiting to convert into sterling right now, you may have a long wait!!) If you don’t have a crystal ball there is always hedging. This might help you to sleep easier at night because you are certain how much you will receive for your foreign currency. You agree a rate in advance with your Forex provider so you know exactly how much you will get for your currency, you may win if the rate decreases from your agreed level, you may lose if it goes up, but at least you will know. Accountants and banks like this!
General Supply di Bottai Barbara in Italy told us that they deal primarily in $USD so to avoid problems they have a $USD currency account as well as a Euro account and they use whichever currency is strongest.
“ We can therefore always count on a decent average exchange, and at the same time we can
grant to our overseas customer a stable level of price for their purchases” Marcello Arbicone, BearingNet member and owner of General Supply di Bottai Barbara
As ever, BearingNet distributors find ways around problems and keep the world turning!
What about you? How are you finding the current exchange rates? Do they effect the way you do business? Let us know below!