The assumption is that a weaker currency brings both advantages and disadvantages. The implications are that imports will be cheaper, potentially causing inflation to rise, but also possibly boosting the domestic economy by stimulating local production in response. Balanced against this is generally better news for exporters, where a weaker currency can increase their sales.
Currency Competition: Winners and Losers
Shifts in currency benefit some and not others in the short-term; but the long-term effect is likely to slow down economic growth. If there is a situation where many different countries are attempting to compete globally by devaluing their currencies there can be longer-term costs to the global economy.
Failure by countries to realise the benefits of devaluation can lead to increased protectionism, limiting free trade and causing an economic slowdown.
“The global economy can feel pretty volatile,” comments Jonathan Barnes, Relationship Director at Santander, “and many businesses are having to consider the risks.”
Exporters and Currency Risk
Market volatility is obviously going to be a concern for anyone involved in export. Foreign exchange brings with it a certain amount of risk, particularly in times of very changeable currency values. There are risks, but ambitious businesses should not necessarily be put off. The key is to be strategic when it comes to currency, where businesses manage their risk and maximise their return.
A foreign exchange strategy can incorporate a number of different solutions, with exporters tailoring their approach to suit their business and the circumstances in which they’re exporting. Some of these solutions are:
- Rate watch – this automatically alerts you, the exporter, when your target exchange rate has been reached, ready for you to then take action.
- Forward contracts – here you plan your currency exchange in advance with a locked-in rate up to 12 months in advance.
- Vanilla options – you pay a premium to lock in a specified exchange rate, with the option to trade at a better rate if it comes nearer the time. It’s designed to protect you against any worst case scenario while allowing you to benefit from upwards exchange movements.
These are some of the measures available, but it is vital that exporters take advice well in advance so that they can find the strategy to suit their particular business needs.
“We can introduce businesses to the right experts to give the professional help and guidance that they require,” Jonathan concludes. “We’re here to make exporting work for exporters.”
Export Experts Magazine would like to thank Jonathan Barnes for his contribution to this article. To find out more about him, please view his LinkedIn profile.