Poor currency decisions can mean eroded profits....

Sterling has finally started to claw back some of its horrendous losses seen over the past year and the Bank of England’s aggressive stance in negotiating unprecedented policies, coupled with a cheaper currency, has potentially seen the UK past the worst of the recession.

This has even prompted some strategists to call Sterling a “screaming buy” believing it to be vastly undervalued. However, one thing we can take from the crisis is that holding out and hoping for gains can be a great opportunity missed. 

Any gains however gradual they are, time and time again are simply eradicated on the back of any negative news. 

Acting sensibly and not getting too greedy has never been more important - it is only a high once it is on the way back down.

UK businesses importing or exporting goods demand very different things from currency markets and regardless of whether a weak or a strong pound benefits your business, currency exchange is sometimes the only difference between profit and loss. 

One thing we do know is that imports are still expensive to UK businesses.  In some cases, small businesses are being forced to put their prices up by 10 percent in order to cope with the fluctuations in exchange rates. 

As the world endures the recession, global demand for goods remains quiet so it’s difficult to see a silver lining to the economic crisis.  No-one knows what the currency markets will do next. But a wealth of experience means knowing which strategies small businesses can put in place to mitigate any risks caused by currency fluctuations.

The right strategy  

Plan early

Give your currency broker enough time to save you money.  You need enough time to consider the different options your broker will suggest before choosing the most appropriate for the business. 

Don’t rush into these decisions, it could cost you thousands of pounds more than it should, and upcoming market data could well move the market in your favour.

Don’t rely on the bank

Forward Contract

A Forward Contract allows you to freeze the exchange rate for up to two years for a 10% (Typical) deposit.  Identify when the rate reaches a price that allows you to make a profit and then eliminate the risk of that deteriorating by taking out a forward contract. 

If you want to set up a forward contract for £100,000 you pay £10,000 up front and the remaining £90,000 before the agreed future date, up to two years later.

Limit Order

With enough planning you can set limits to make sure you get the most out of the currency exchange markets.  A Limit Order allows you to take full advantage of fluctuations and automatically buy or sell currency at a pre-determined level. 

Your broker will help you to look at the market and decide upon a realistic upper level that allows you to make the most of fluctuations without being triggered so soon that you miss out on the peaks, allowing the markets room to breathe in the middle.

Stop Loss

The opposite of a Limit Order and acts as a safety net, you agree and set a lower limit at which you are prepared to buy or sell a currency guaranteeing your exchange rate will get no worse. 

If a currency loses value and you have set a stop at an exchange rate where you can still make a profit the transaction is automatically triggered once it reaches that rate, minimizing your losses whilst giving you the chance to monitor the markets for a more advantageous rate, and can work well with a limit order at the same time.

Don’t make the mistake of relying on your bank; speak to a specialist currency broker early as they will provide you with information that could save you money based on their extensive experience of the currency markets. 

FC Exchange speaks to businesses every day that could have lost out on profits because they’ve used the bank in the past, or called a broker too late in the process.  Act now and make sure your business doesn’t miss out.