In the shadow of Brexit and the US election, the Euro has been a beacon of stability. But, with geopolitical unrest and QE from the ECB potentially triggering a turbulent patch for the currency, we examine how multinational companies can manage their payments in the face of this uncertainty.
The Euro this year was the calm within a currency storm. Compared to the strong dollar and the weakened pound – the Euro maintained a largely steady position. However, this ended when the Euro hit an all-time low in November against the Dollar as the market reacted to the expectation that the ECB will continue its loose approach to monetary policy to fuel Eurozone inflation.
And there is little respite on the horizon. With a global wave of populism, following the victory of both Brexit and Trump, the unity of the Eurozone, and even the European Union (EU) itself is under threat. Brexit has potentially set a trend and decisive elections in France, Germany and Holland are all in the pipeline while in Italy a constitutional referendum, not to mention a banking crisis, is around the corner.
With a weakened Euro and a chock-a-block election calendar next year, multinationals exposed to the currency have a lot to consider. That said, it is not all negative and there are also opportunities to be made. European countries that export heavily to the US, especially the likes of Germany and France, will experience a welcome boost with the decline of the Euro as most global trade is denominated in US dollars. Companies such as car manufacturers and pharmaceutical firms in Germany, as well as food and beverage corporates in France, can use the exchange rate to create a more competitive pricing structure to boost sales. Across the pond, US companies purchasing goods and services from those within the Single Market will also find they have more bang for their buck.
There are a number of steps financial controllers can take when it comes to executing payments and transactions in order to make the most of the moment:
1. Take advantage of currency dips to lock in low rates: Considering the fact that the Euro is at the lowest it has been against the dollar since its inception in 1999 – it would be wise to lock in a future purchase at this low rate and hedge your payments. This is especially important for those based in the US that are buying goods from within the EU. By locking a low rate in now, companies can still benefit from the historically low Euro even if it begins to strengthen. But buyer beware - if the Euro dips even lower, you will still be locked in at the contracted rate and could short yourself the difference of a sliding Euro. This is where forecasting and running scenarios become extremely beneficial to financial teams.
2. Know your payments provider’s strengths and weaknesses: For exporting nations within the EU, the weak Euro is ideal. Take Germany for example, which exports 1,507 billion US dollars worth of goods a year, only third behind the US and China. For German exporters, the low Euro is an opportunity to expand their exports into the US. While their existing providers might have been a good choice in the past, they might not offer a competitive solution with a focus on the US. Therefore, treasury teams at corporates need to assess their providers to ensure that they have a strong foothold in the US. If they don’t, German exporters might find they are losing profit to lifting fees and other costly inefficiencies.
3. Automated feeds and historical data: Lastly, while a low Euro is beneficial to exporters – an extremely volatile Euro is dangerous to all. It makes managing your income and outgoing payments and transactions difficult and your price structure can vary wildly. The Euro has an undoubtedly bumpy road ahead. The rise of Le Penn could very well threaten the fabric of the Eurozone and election results could have Brexit-esque effects on currency swings. In order to prepare for the next few months, corporates within the EU need to ensure they have automated and transparent exchange rates as well as a broad view of historical data.
Ultimately, for buyers based in the US and the exporting powerhouses of Europe, the Euro’s weak stance against the Dollar is a golden opportunity. Alongside this though, volatility is forecasted and the Eurozone could be in real danger depending on the outcomes of upcoming elections. Treasury teams that grab the opportunity now with both hands, but keep a keen eye on the near future, will be best prepared to succeed.