The currency risk implications for UK and EU businesses
Ref: Charts by P Singh using data derived from currency data supplied by the ECB
The first chart above shows that in July 2022, the € depreciated to €1:$1.00 (Parity), reflecting the currency market's fears over the adverse effects of inflation, recession, interest rates, soaring energy prices and energy rationing, on businesses and consumers across the Eurozone. As is often the case, the US economy and $ assets have been seen as relatively safe havens during geopolitical tensions and market volatility, and so the flight to buying the $ in preference to the €.
The second chart above shows how the UK Pound has appreciated against the € but, like the €, has depreciated against the $, for the same reasons cited above for the €, except perhaps that the UK is not as dependent as the EU has become, on Russian oil.
Currency volatility and the consequences of not hedging
What does currency volatility mean for businesses that do not hedge? In a word, risk.
Risk of generating less cash than expected, which can lead to pressure to pay creditors as they fall due, breaches of covenants, inability to tender for contracts or to fulfil existing contracts, inability to pay staff, or to pay for stocks.
In addition to the negative cashflow, reported earnings can fall, which can send out the wrong signals to potential lenders, trade suppliers, and customers.
Auditors might refuse to sign-off accounts if they have doubts about the going-concern status of the business or its ability to provide working capital for the next year. Without audited accounts, suppliers might reduce credit terms or insist on cash on delivery. Lenders might charge higher interest rates, insist on greater security, refuse to lend, or call in their loans.
Employees might abandon ship, lose morale, or refuse to take a cut in salaries to conserve cash. Redundancy costs can be expensive and a further drain in cashflow.
To discuss your currency risks or currency transfers, contact me now, without obligation or charge.