As sterling sinks to a one-and-a-half-year low against euro amid Brexit fears, Natasha Lala, managing director of OANDA Solutions for Business, explains how UK corporates are managing their risk through these uncertain times.
From “Britain taking back control” to “leaving isn’t a price worth paying” – the EU referendum campaign starting gun has been well and truly fired. The trouble is that beneath the carefully crafted sound bites from both sides, many have been left scratching their heads about what the future holds.
At the start of this year, no organization could have predicted that Brexit fears would trigger the sterling to dollar rate to fall below 1.40. Nowhere is this more troublesome than among manufacturing businesses – as a weak pound calls into question whether exports are at an advantage or disadvantage. In theory, new markets should be opened up for these businesses to sell into as British exports will be cheaper. On the flip side, recent research from Begbies Traynor indicates that 21,000 manufacturers faced “significant financial stress” during the first three months of this year, as many have decided to put the brakes on trade agreements until after the referendum.
Despite creeping back up 0.2 per cent against the dollar this week due to a rally in the stock markets, the truth is that nobody knows what level sterling will be at come polling day. Regardless of the outcome, the only thing corporates can be sure of is that the decision will have a direct impact at month or quarter end when they close their books. Not only will firms have to budget forecast their revenues for the quarter, they will also have to budget for what their hedging risk is likely to be. If market volatility from Brexit concerns has taught corporates anything so far, it is that they can ill afford not to have weekly or even daily views of their risk exposure to sterling/euro or sterling/dollar.
The question businesses need to ask themselves is how much should they increase their hedging by. Nobody is ever 100 per cent hedged, but since the referendum date was set, UK companies have increased their hedging ratios from around 60 to 70 per cent. Approaches of course differ from organization to organization. A FTSE 250 firm with large corporate treasury teams and highly sophisticated technologies is likely to be ahead of the curve. CFOs and financial controllers at small and mid-sized firms, on the other hand, need to first ensure that they have a reliable and accurate source of FX rates – before they can even think about hedging. After all, these rates are only as good as the data at their disposal. With just ~60 days until June 23rd, and with the price of sterling changing almost daily, the last thing any business wants is to make financial transactions based on inaccurate data.