Foreign exchange strategy for uncertain times

As post lockdown measures continue to be announced on a regular basis, thoughts have inevitably turned towards how, when, and even if things will return to normal. For business owners, it’s important to help manage uncertainty by planning for different eventualities. 

From social distancing to supply chains, there are many factors your plan will need to take into account. Amidst all this uncertainty, do not forget currency exposure.

Even when markets may appear to be calm, there is still the potential for a great deal of volatility. Therefore, businesses should strive to have currency risk management strategies in place to help absorb some of the potential costs of recent business changes by getting the right exchange rate.  Some of the uncertainty can be mitigated by ensuring your strategy is sufficiently flexible and adaptable.

In our opinion, your FX risk management “to do” list should look as follows:

·        Get visibility of your sales pipeline and be realistic in how much that could grow in the coming months.

·        Simulate the effect of different exchange rates on your profit margins based on higher/lower input costs or higher/lower sales revenue.

·        Set budget rates on which to sell/buy and place market orders if the right level is not available today.

·        Align your hedge strategy with your expected capacity – eg if you’re likely to be running at 50% capacity, the amount you hedge should be adjusted accordingly, whilst still taking into account risk appetite.

·        Learn lessons from the past couple of months. How did your existing risk management strategy hold up under such extreme circumstances? If you could go back, what would you change? More hedging, less hedging, different products, different rates?

·        Stress test your strategy. Hindsight is a wonderful thing, but with science and history telling us there could be further waves of the virus later this year and next, are you confident your plan can adapt and is robust enough to withstand future shocks? Or, conversely, not be too cautious should the recovery prove to be V-shaped after all.

·        Cash flow is king – where possible secure your rates in advance to ensure you have visibility of your cash flows and do not have cash tied up where it is not needed.

·        Think of longer-term needs. In the near term, business may be limited, but as the economy is gradually revived, plan for growth. Don’t neglect planning for Q2 2021 just because Q4 2020 is looking poor.

·        Above all, be ready to move when the opportunity presents itself. Know who will do what and get any required authorisations in place, particularly if this is likely to be harder than normal where working remotely.

It is important to remember that hedging products are derivative products which involve risks due to the volatility of the FX markets and may not be suitable for every business. Engage with an FX specialist who has in-depth knowledge of these products, especially how and when to employ them and what the benefits and consequences could be for your business.

Western Union Business Solutions has the capabilities to help you manage currency risk and help protect your profits. Our experts can help you build policies to deliver visibility, confidence and efficiency for your business.

To support organisations in the current market environment, Western Union Business Solutions is offering businesses zero transaction fees for any payment transaction booked that involves a currency conversion. Please contact partners@westernunion.com and quote ‘Funding Circle’ to receive further information about this offer. Also enjoy the added benefit of our fee-free* international payments software, WU® EDGE, which gives you a simple overview of your transactions and seamless accounting system integration. WU EDGE is available to all activated clients.

For businesses with more sizeable demands or a more frequent requirement, Western Union Business Solutions will offer a free meeting with a regional business manager to discuss specific requirements directly.

If you would like further support or have any questions, contact partners@westernunion.com or click here to sign up for a free, regular FX market analysis through our Daily Market Update and/or the Monthly Currency Outlook.

This article is for informative purposes only and should not be considered financial advice. Funding Circle is not authorised to and does not give financial, regulatory, legal or tax advice. If you have further questions please speak to an independent financial advisor.

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