UK small and medium enterprises (SMEs) moved quickly to protect their businesses from extreme volatility in currency markets following the ‘Brexit’ outcome of last month’s referendum, reports WorldFirst.
The foreign exchange (FX) says that the highest concentration of hedging trades in 2016 took place on Friday June 24 as the decision to exit the European Union (EU) was announced.
World First’s Q2 2016 Global Trade Barometer (GTB) describes a “knee-jerk reaction” of UK SMEs to a plunging pound in the wake of the Brexit result.
It notes that the reaction of SMEs to lock-in rates and hedge their currency exposures in the immediate aftermath of the referendum result contrasts sharply with their behaviour in the preceding three months – a mixture of confusion and not knowing which way sterling would move seem to have caused the initial paralysis.
SMEs’ use of hedging products – principally forward contracts and currency options – declined throughout the second quarter of 2016; falling 54% in the week before the referendum compared to their activity in early February. Former prime minister David Cameron confirmed the date of the EU referendum on February 20.
The Q2 GTB also reveals the impact of currency volatility on UK SMEs’ investment decisions; 24% stating that it had negatively impacted decisions to support development and growth in Q2, up from 15% in Q1.
In addition, 46% said that they were worried about on-going currency volatility and the impact it could have on their business, up from 31% in Q1, while 77% expect sterling to be volatile in Q3 – a 22 percentage point increase compared to their views last quarter.
Trade flows to Europe fall
The euro remained UK SMEs’ currency of choice in Q2, although the proportion of currency trades denominated in euros fell sharply, from 49% to 34% in Q2 as the US dollar (USD) came back into favour.
Despite the immediate uncertainty, UK SMEs continue to trade internationally and explore new export markets with Norway and Canada seeing 25% and 20% increases in payments quarter on quarter respectively.
A significant portion (46%) of SMEs disagreed with the statement that the outcome of the EU referendum vote had been positive for their business’ future prospects, while only 29% agreed and 25% said that they still didn’t know.
Perhaps having been negatively impacted by a movement in rates, there was a seven percentage point increase (Q1 7% v Q2 14%) in the number of SMEs saying that they are not confident in their business’ ability to manage currency risks.
“Friday June 24 will go down in history as the one of the worst days in sterling’s history, following huge fluctuations as Brexiteers eventually won the day,” commented Jeremy Cook, chief economist at World First.
“It may also prove to be a pivotal day for the UK’s importers and exporters, with the latter rubbing their hands with glee whilst many of the former would have been left with their head in their hands. Now more than ever, businesses need a currency strategy to help them mitigate the risks to their business of future volatility, as we believe that volatility, uncertainty and fear is here to stay.
“It is easy to get swept up in all the apparent doom and gloom as the UK wrestles with its political and economic future, but this is an opportunity for some businesses to flourish. Exporters have seen their price competitiveness improve in light of the recent fall of the pound and a cheaper sterling could allow for an investment boost. The focus for UK SMEs should be to implement a ‘fix-it’ currency strategy and protect themselves from any future volatility.”
When it comes to the relationship between Europe and Britain – uniformity isn’t a word that currently springs to mind. And that’s not just a reference to Brexit. Whilst the Europe and Britain do find themselves in the midst of a political break-up – their monetary policies are also showing signs of divergence.
Europe’s introduction of the General Data Protection Regulation (GDPR) next May will have implications for businesses around the world and US corporates should start getting ready if they haven’t already done so.
The recent NotPetya cyberattack underlined the need for organisations to address their exposure and how to mitigate the risk.
As anticipated, US organisations exited prime money market funds en masse following last year’s SEC reforms. AFP’s latest Liquidity Survey indicates what it will take to encourage them back.