We have a large number of creative and innovative businesses here in the UK with a lot to offer the international marketplace. The UK government recognises the crucial role exports will play in the recovery of the British economy, and has recently announced a target to double the nations exports to 1tn by 2020.
Expanding overseas can be rewarding and highly lucrative for many businesses enabling them to select markets where there is a high demand for their product and as a result, offer favourable returns. Of course, there are currency risks involved when you’re looking to enter the realm of global expansion, but with careful planning these risks can be managed.
One of the first things to consider when looking to export is the current state of the currency market that you’re looking to enter. Currencies around the world are affected by many factors being moved by elements such as supply and demand, economic growth, interest rates and politics. Because of this, it is vital to have a solid understanding of the currency market you’re entering, its history, and the factors that may affect its future. From this, you can develop a strategy to best manage your investment risk.
Although all currencies are subject to fluctuations, on the whole, emerging markets such as Thailand and Brazil will pose the most risk to an internationally trading business. In terms of currency, emerging market economies tend to be more volatile, which makes it particularly important to have a strong foreign exchange strategy in place.
A recent example is Thailand. If you have been watching the Thai markets this year, you would have noticed the instability of the GBP/THB rate. This movement has been due to a combination of political disruptions in Thailand, causing the Baht to weaken, as well as an improving UK economy contributing to a stronger sterling.
Exchange fluctuations like this, although seemingly good for the pound, can reduce the returns on your product or service when selling overseas. It is insight such as this that you can apply to your trading plan and seek the best services to help hedge against currency risk.
Commodity currency markets
Other currencies to keep a close eye on are those with a value pegged to commodity prices, such as the Australian Dollar and South African Rand. Since exports and economic growth are directly related to a nations domestic industry, if the industry relies heavily on one component, such as oil exports, the global climate of this commodity can strongly affect a currencys rates.
If you are dealing in a commodity currency, it is wise to thoroughly understand the external factors that may impact your trading, such as political conflicts. As with emerging markets, there are services available can help you manage your money whether it’s deciding to trade in line with the floating rates, or securing a fixed trading rate for a period of time.
Some currencies have a tendency to fluctuate more than others, but even the most stable currencies will still change in value throughout the year. If you are operating in high volumes, even the smallest of exchange rate movements can have an impact on an unprepared businesses. The GDP/ USD rate for example, has gone from a low of 1.4 to a peak of 1.7 this year. Fluctuations such as this can significantly affect your payments margins, so even if your export plan only involves the USA – you should still keep your foreign exchange strategy in mind.
Having said this, currency movements should not put off ambitious businesses from expanding internationally. Those businesses who do their research can take steps to protect their business margins from exchange rate fluctuations.
For those starting out their exporting endeavours, we would always suggest seeking support from a foreign exchange specialist to ensure you get off on the right foot. By consulting an expert you will be able to talk through any concerns you may have, along with discussing areas of potential risk within your export plan.
Along with guidance, an expert can talk through specialist international payment products such as a forward contract plans. Services like this can offer increased stability to your numbers, enabling you to trade at a fixed rate for a predetermined time instead of in line with the market.
All in all, expanding internationally is an incredibly exciting time for any business owner, and a strong foreign exchange strategy will only put you in better stead towards exporting success.
Next week Kevin Grant will advise SMEs on how to protect your business revenues from currency fluctuations