We are in the midst of a period of significant volatility in currency markets. The ongoing travails of the Greek economy, tough questions for the leaders of the Eurozone, a slowing Chinese economy and the ongoing speculation around when the Fed (and the BoE for that matter) will choose to raise interest rates, all add to a volatile backdrop. To put that into context, UK businesses purchasing in USD will find those good or services about 6% more expensive than just one year ago, though buying from the Eurozone is about 13% cheaper.
Trying to navigate it can bring even the most battle-hardened finance director out in a cold sweat but with these five simple tips, you can find your way through with confidence.
1. Set a budget rate
Many SMEs use a budget rate to calculate costs on goods bought in other currencies and expected revenues on overseas sales and is an essential planning tool. The rate is often set by using prevailing forward rates and should be achievable by entering into a hedging transaction.
2. Keep up to date
Currency markets can move quickly and suddenly in response to things like political events or significant international economic news. Of course, you could try and keep up with it all yourself but signing up to Jeremy Cook’s Morning Update is probably a lot easier.
3. Understand the ‘cost’ of your currency
The ‘spread’ is the difference between the price the broker pays for your currency and the price at which they then sell it on to you. Don’t be afraid to ask your broker to explain the spread, as well as any other fees, so that you know exactly how much your currency is costing you. And a word to the wise; some brokers use ‘honeymoon rates’ to win business and gradually increase the spread over time.
4. Make sure you consider your options
Many SMEs use a combination of spot contracts, where you accept a given exchange rate ‘on the spot’, and forward contracts, which allow you to fix a rate for up to three years. Alternatively, the answer could lie in a made-to-measure currency option which could give you the protection of a forward whilst also allowing you to benefit from the upside if the market moves in your favour. There are pros and cons whichever approach you choose and a good broker will explain everything before you decide.
5. Go to a currency specialist (helpful signpost: like World First)
Lots of businesses still use their bank to make international payments when they could save money by using a specialist broker instead – money that will directly affect your bottom line too. It’s worth remembering that you have options and a good broker will take the time to understand your needs and find the best way forward for you. That’s what we do at World First - there’s nothing ‘off-the-peg’ about either our solutions or our approach.
Matt James works at www.worldfirst.com/uk. World First aims to offer SMEs better rates and service than the banks. To talk to an expert about an international payment or protecting yourself against currency market volatility call 020 3411 3192 or email email@example.com to arrange a call back.