Brexit Breeds Uncertainty Around FX

For those that feared a “leave” vote, the sub-optimal, if not nightmare, scenario actually materialised. Those that did take the advice to provision for Brexit are probably benefitting from their actions, while those who were extremely confident that the UK would “remain” may be regretting their decision not to implement a contingency plan.

Although the British economy has been resilient to downside pressures, as pre-emptive action by the Bank of England has eased concerns about recession, there has been a notable lack of support for the pound. But overall, the economy has maintained its pre-referendum trajectory.

So now the British public has had its say, what is the mood among companies with FX requirements?

At EarthportFX, we conducted a survey of 75 companies with annual FX volumes averaging less than GBP 10m. We asked what they felt their biggest challenges going forward were and how they expected to manage their FX risks in an ever-changing and riskier environment. It was evident that uncertainty is currently the underlying sentiment.

Over half of survey participants expected a significant impact on their business, especially over the long-term. More than a third envisaged business revenues would remain unchanged. And around 20% were completely unsure of the implications of Brexit.

The devaluation of the pound has already affected small and medium-sized enterprises. The cost of importing goods has risen but the majority of companies have yet to mitigate risks.

Indeed, 80% of those companies surveyed said they had not hedged any currency exposures since the Brexit vote. Was this a surprise to us? Not really, as exchange rates are at trade-weighted low levels not seen since the financial crisis. With many businesses already operating at a level below cost, they are clearly hoping to take advantage of any rate improvements in the market.

Looking at the bigger picture, we also asked how companies are mitigating the risks associated with the process of leaving the European Union. A large percentage did not feel that trade agreements are essential for their businesses as the increased costs of trade may have the biggest impact on their ability to remain competitive. Trade agreements and potential trade terms could, in theory, actually increase costs and raise the regulatory bar and limit market access. All of these factors could result in an even weaker pound.

At present, the British economy continues to recover, but SMEs are struggling to balance the increase in costs and heightened level of uncertainty facing their businesses. Many are adopting a watchful strategy, which does come with risks of its own, but at the same time, they are reducing their FX costs in order to protect profitability and competitiveness. For all of us, Brexit remains a waiting game that will be characterised by prolonged anxiety that we will have to come to terms with.

However, preparing for possible further turbulent times ahead by hedging against currency fluctuations may well go some way to alleviating this anxiety.