BREXIT OCTOBER 2020
CURRENCY
CONUNDRUMS immimagery /stock.adobe.com
How to ensure you get the best rates when looking to do business in new markets
BY LEE McDARBY, MD, CORPORATE FOREIGN EXCHANGE AND INTERNATIONAL PAYMENTS, MONEYCORP
The UK manufacturing industry is the
www.manufacturingmanagement.co.uk
18
ninth largest of its kind in the world. It
accounts for 45% of total UK exports, and
punches well above its weight in terms of
entrepreneurial talent, ambition and drive
– a feat demonstrated by the way the sector
has dug deep over the last six months.
We know the industry is undergoing a period
of significant change, forced to rapidly innovate in
light of the coronavirus pandemic and shift supply
and demand chains in line with the looming Brexit
deadline. As shown in a recent report (https://bit.
ly/2T6ucLR), Brexit may create additional costs, be
it through tariffs, customs declarations, certification
costs, audits or border delays.
With all this taking place potentially as soon
as the end of 2020, it is vital that businesses
think about strategies to stop the costs of Brexit
eating into their bottom line. Now more than ever
manufacturers need to pay increased attention to
their foreign exchanges, to not only make savings in
these choppy markets but grow their presence on
the global stage and invest in new technologies –
both vital for growth after the Covid-19 depression.
However, this doesn’t have to be daunting,
there’s still plenty of time to shore up your supply
chains, assess your currency exposure and explore
new markets. Here’s how.
Firstly, understand your currency exposure –
take a look at your balance sheet and consider what
fraction of overall incoming and outgoing funds are
exposed to foreign currencies. This will help indicate
the measure of risk. From there, a consideration
needs to be made, looking at where the market
may be growing or shrinking and where the future
opportunities lie.
Considering your supply chain is also crucial
when it comes to getting ready for Brexit. According
to ONS, a third of UK manufacturers believe that
the EU will remain their growth market for the
next five years. This comes as no surprise, as nearly
half of UK exports and imports
of manufactured goods go to,
and come from, the EU, and EU
labour helps plug skills gaps in
the UK. Moreover, Just-In-Time
principles lend themselves well
to suppliers closer to home and
allow your business to be agile
and respond quickly to new
trends and opportunities.
As you plan to continue how
you trade with the EU, ensure you
prepare for a weak or fluctuating
Pound, as currency continues
to react to the progress of the
negotiations. For example, in the
last couple of months the Pound
to Euro exchange rate has varied
by almost 5%. In choppy markets,
keeping your finger on the pulse
of currency fluctuations is key.
An easy way to keep on top of
these changes is to use a currency
tracker, such as the one available
with a moneycorp account, that
will send you an alert when a
currency reaches your ideal rate
to exchange.
Nevertheless, Brexit presents
opportunities for manufacturing
businesses to explore new
markets. 15% of manufacturers
believe that China will be a key
growth market in the next five
years and 13% North America. In
this sense, it’s important to keep
track of bilateral trade deals with
powerhouses such as China, India
and Japan, to make sense of what
beneficial tariffs may be available
to you, whilst also staying on top
of the key drivers of currency
fluctuations in these markets.
When considering the
geography of your supply chain,
it’s important to remember that
each country comes with their
own challenges, whether it’s
an established market or not.
Emerging market currencies
may be more volatile, and their
restricted nature means there
can be high information hurdles
and costs when transacting in
restricted currencies onshore.
Look for payments providers that
have local onshore banks, as this
will help facilitate local currency
transactions at a fair cost.
Key to trading in new markets,
where currency movements
may be uncertain, is establishing
a dynamic hedging strategy. A
currency hedging programme
should be constantly evaluated
against budget rates, changes
in nominal value of contracted
delivery and changes in timelines
or commitments. Utilise products
that balance both flexibility and
protection, such as forward
contracts and options structures.
In doing so you can ensure that
during times of heightened
volatility, you do not become over
or under-hedged.
It’s never too late to get
prepared. To best keep up to
speed on how your business
might be impacted, visit the
government transition website
(https://bit.ly/3hat2IV).
Brexit will
encourage
companies to
explore new
markets, says
Lee McDarby
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