As the budget airline reveals that the strength of the pound against the euro has left it trading ahead of target, Matt James of international currency experts World First looks at the FX lessons for SMEs.
In its latest trading update (released March 26th), easyJet was able to please both analysts and investors with news that it was likely to beat its target for the six months to 31st March. Pats on the back all round and a round of drinks on the FD after work then? Perhaps.
Those with the time or inclination to delve beneath the headlines, however, will find the reason for this success without too much trouble. The opening paragraph of easyJet’s release states: “easyJet expects to deliver a first half performance ahead of the guidance given in the 27th January 2015 trading statement primarily due to the movement of exchange rates in the second quarter.”
The cause of this improved performance? Movements in currency markets. And reading a little further reveals something even more interesting. The company notes that it expects its ‘foreign exchange impact’ for the half year to 31st March to be “favourable”; to the tune of £20m in fact. However, it also notes that it expects the impact for the full year to be “adverse” to the by-now-familiar-sounding tune of £20m. Such are the slings and arrows of the currency markets.
So, what is going on?
Euro slumps in face of ongoing Greek tragedies
Currencies rise and fall against each other every day based on things like unemployment figures, budget announcements and interest rate calls. But recently, the poor old euro has tended to lose more often than not. With fierce debate and politicking surrounding Greece’s membership of the single currency in recent months, the euro has slumped. Today, the pound is worth around 15% more against the euro than it was a year ago.
The volatility in currency markets has spread beyond the Eurozone too. As the US economy continues to improve, and both analysts and commentators whip themselves into a frenzy about the possibility that the Federal Reserve might raise interest rates, the US dollar has risen. The pound is worth about 10% less against the US dollar than it was a year ago.
So, what can small business owners learn from easyJet?
If you buy or sell abroad, the movements between pairs of currencies can affect your business – in other words, it’s not just a ‘big business’ problem. Regardless of the size of your company, dealing internationally brings risks as well as rewards as you realise that you can influence your business performance but you are powerless to stop profits being eaten by currency movements.
Hedging could be the answer. It’s a way to protect your business from this market volatility and save your bottom line – and no matter how big or small, every business has a bottom line. This is done through a ‘forward contract’ which allows you to buy or sell a foreign currency at today's prices for a specified period of time. It’s a great way to help you plan and forecast so that you don’t get caught out.
Find out more about FX and currency on the Workspace website.
Matt James is a currency expert at www.worldfirst.com. 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 firstname.lastname@example.org to arrange a call back.