Industry experts have warned that increasing volatility between currency pairs will continue to present huge challenges for organisations that trade internationally, as swings becoming increasingly larger and more violent.
Recent volatility in China’s Shanghai 300 led to a correlation in similar volatility in FX in the Australian Dollar and the Japanese Yen – who both have strong trade links to China. While not affected immediately, currency fluctuation between the yuan and other currencies soon followed – and volatility is expected to continue. The Euro/GBP currency pair continues to be unstable in the wake of the ongoing Greece economic crisis. FX volatility is unpredictable due to the external factors that influence it, and the result is that some currency pairs are affected more severely than others.
SMEs that trade globally are particularly at risk, as they are less likely to be able to absorb the costs associated with unexpected changes in FX and do not have the resources or understanding to successfully manage foreign exchange risk. The more countries a business trades with and the more currency pairs there are to contend with, the more challenging forecasting becomes. Even a small amount of fluctuation between currencies can result in thousands of pounds being lost.
Because they are unable to effectively safeguard their business against exchange rate fluctuations, SME’s earnings and cashflow can become unpredictable – leading to greatly reduced profits and asset values when converting foreign currencies into GBP.
Many SMEs expand into global markets without fully taking FX rates into consideration. A contract signed with a client or supplier, with prices agreed, may change due to exchange rate fluctuations overnight, and the local currency amount payable on settlement may be higher than the amount calculated when entering the contract, due to an adverse movement in the market price of the currency.
In addition to this, the majority of SMEs rely on their bank to manage international transactions, some of which charge fees up to 90% higher than alternative B2B cross border transaction providers, such as Banking Circle. With a number of banks charging a separate fee on top just to make payments in local currencies, it is no wonder that SMEs wasted an estimated £2.3 billion in non-EU international payments in 2014.
While there is no way of preventing volatility, there are ways that the impact can be significantly reduced. Businesses should identify the currency pairs that are causing the most significant impact on their bottom line and consider making changes to the financial instruments which they most frequently use to manage FX risk.
Streamlining the way in which cross border payments are made can help to reduce FX risk. Delays in international payments, and making transfers between multiple bank accounts in local currencies – even in small amounts – can result in profit margins being squeezed.
Making international payments from a segregated IBAN account which has access to a substantial FX liquidity pool can help to protect businesses from fluctuating FX rates and goes some way towards making accurate forecasting more achievable for SMEs.