How to protect your business from volatile currency changes during the U.S. election.
With less than two days until the new US President is announced, most political commentators feel that Clinton has a good chance of carrying the vote. However,
pundits also confidently predicted that Britain would vote to remain in the EU, and those forecasts were shot down when a narrow majority of 52% voted for Brexit in June.
That vote triggered huge volatility in the pound – and should Donald Trump clinch an unexpected victory in the US this year, the dollar will likely suffer the same fate.
Of course, any movements in the pound entail significant risk for British businesses trading with the US. Currency shocks can severely impact these companies’ bottom line – and whether or not they’re confident in their Presidential prediction, they shouldn’t rest on their laurels when it comes to a currency strategy.
Here, currency expert Alex Edwards provides guidance for IT businesses seeking protection from a volatile dollar:
What are the advantages of a currency strategy?
The primary reason to develop a currency strategy is to protect your business against market volatility, and make working with currencies more predictable.
Without one, your business will be subject to the whim of the markets, and any sudden movement in exchange rates could place your profit margins, and ultimately your entire business, at serious risk.
An effective strategy for dealing with currency can provide your business with a buffer against these forces – and while it won’t work magic, it can certainly help you avoid the kind of overnight losses that some businesses experienced around Brexit.
Creating an effective strategy
There are three tools that, when used together, will enable you to build a currency strategy: forward contracts, limit orders and spot trades.
Forward contracts work to provide long-term security for a business, by locking in today’s exchange rate for a later date. This way, you’ll be able to know exactly what rate you’ll get in a month or even a year, and can construct a business plan around this. Currencies are not static, but forward contracts will help you mitigate the risk that comes with such fluidity.
Limit orders are an automated service that optimises your returns, by setting an ideal rate for exchange for your international transfers. When the target exchange rate is achieved, your funds will be transferred automatically. If your international payments aren’t urgent and you’re not happy with the current exchange rate, this is a good option.
Finally, there are spot trades. Made on the day, and at the current exchange rate, these transfers are often used in combination with forward contracts and limit orders to create a strong currency strategy. Depending on your appetite for risk, you could set some money aside to trade on the spot – this way, you won’t lose out if the exchange rate moves in your favour.
Making it through the election
As the election enters its final days, keep an eye on both campaigns, and check the polls regularly to keep on top of market-moving data. Polls have affected currency in the past, and so it pays to look out for anything that could move rates.
The dollar will likely weaken if Trump wins, largely due to his controversial policy plans, which would result in great uncertainty in the markets. For example, his intention to build a border along the border with Mexico could provoke the Federal Reserve to hold back on an interest rate rise in December, a move which would further destabilise the dollar.
Should Clinton win, the dollar should strengthen in response to the greater levels of certainty her administration will likely bring. An extension of Democratic control over the White House will iron out bumps in the transition of power, creating far less turbulence than a move from Obama’s liberalism to Trump’s conservatism.
A concrete currency strategy will lessen the effects that all this could have on your business, so it’s worth allocating the time and resources to get it right.
Think about your supply chain
Currency fluctuation goes both ways, and you’ll be affected if you’re buying from the US, and if you’re selling there.
Even when monumental national and international events, such as the presidential election, aren’t on the horizon, it’s still imperative that you pay attention to your supply chain, and how it may be affected by currency movements. If your business does not currently have access to good exchange rates, you may be able to make significant improvements to your profit margin if you attend to your currency strategy – not just around this election.
Settling on a payment provider
We are in unchartered territory at the moment, and the political and economic environment is facing a period of heightened instability and uncertainty.
When choosing a payment provider, keep in mind that pricing models differentiate from one company to the next, so make an informed decision based on the options available. Look beyond your bank for currency support. Though you may trust them for other services, it is worth considering a specialist for the improved rates and currency guidance they can provide.
Once you’ve narrowed down your options, do remember to look beyond good exchange rates. Sign-up fees, transaction costs and monthly subscriptions will decrease your returns, and could be a nasty surprise if you haven’t investigated them up-front.
To get the best deal, always speak to potential providers and ask them to give you a quote, based on your company’s specific requirements.