Currency markets and currency conversions are often complicated, but by understanding the basics, looking at bank forecasts and looking at how exchange rates can affect a businesses bottom line is incredibly important for the P&L. 2017 was a year of volatility, just looking at the major currency pair fluctuations in October – December 2017, exchanging £1m / €1m between the min and max currencies could have resulted in up to £52k loss (5%) as a result of currency volatility.
Currency Exchange Rates, what did we see in 2017 how can businesses prepare for 2018?
|Currency Pair||Amount Exchanged||Low||High||Potential Loss|
|GBP / USD||£1m||£1/1.3024||£1/1.3549||£ (52,500)|
|GBP / EUR||£1m||£1/1.1068||£1/1.1374||£ (30,600)|
|EUR / USD||€1m||£1/1.1552||£1/1.1872||£ (32,000)|
Table 1: Highs and Lows for major currency pairs between October 2017 – December 2017 and potential loss if trading £1m. Source: Smart Currency Business
Currency exchange rate fluctuations are particularly problematic for those that export or import goods globally. 2017 proved a roller coaster year of currency fluctuations, driven my politics; the rise of Trump and Theresa May negotiating Brexit, civil war in North Korea, extreme weather events such as Hurricane Harvey and Hurricane Irma in the US, and political unease such as Trump controversially declaring Jerusalem as Israel’s capital. The dollar rallied against most major currencies as new tax reforms were hailed as positive for US business, and once again, 2017 was a fairly strong year for global equities, with the S&P enjoying 27% growth.
In the UK, the weak pound continued to help exporters enjoy growth, as other markets were able to purchase UK goods. Overall, the UK ended the year on a fairly positive note, with PMI, manufacturing and construction data holding positive. In November 2017, Mark Carney announced an interest rate increase of 25BP to 0.5% to try and alleviate the inflation the UK has seen since the EU referendum.
GRAPH: GBP/USD rates from Jan 2017 – Jan 2017. Source: MacroTrends
Understanding the change in exchange rates and how this affects a businesses bottom line is important. For those businesses trading on low or thin margins (e.g. commodity traders), currency volatility and longer payment terms can significantly impact profitability. As mentioned in the table above, if you purchased £1m worth of goods in euros back in October 2017 and received payment off the end customer in December, due to FX volatility, the value of your goods would have dropped by around £30k.
Larger corporations such as General Electric, Apple and McDonalds were highly successful at combating FX risk, given their supply chains operated globally and purchasing goods in different currencies was the norm. Taking advantage of fluctuations in exchange rates was crucial to their success. Many other firms tried to do the same but they made mistakes and were not able to reach the good sales that they thought would appear as rates changed in a way that hurt the companies
All the information that you need about currency exchange rates and evolution is available online. Look at the currency conversion offered in these links so that you can see the exact value of the main currencies.
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