CURRENCY FLUCTUATIONS

 

In case you hadn’t noticed, the British pound (GBP) has endured something of a volatile period during the last 14 months.

 

After plunging to a 31-year low in the wake of last June’s EU referendum vote, the GBP rallied to some extend and even managed to enjoy 0.8% growth against the U.S. Dollar in May. It has now to an all-too familiar six month low against the dollar, while continuing to trade in a narrow and depreciating range as Brexit negotiations continue.

 

With further fluctuations expected in the near-term, the question that remains is how surely should businesses take the constant shift in the value of the pound? Let’s take a look.

 

Currency is a Volatile Asset, but this Means Something Different for Businesses

 

At first glance, it may not seem as though businesses should fear a fluctuating currency too much. After all, traders are not familiar with the shifting value of currency, but they also leverage this to profit in a depreciating marketplace. Not only this, but the great recession and its fall-out has created an even more robust and resiliant generation of traders who are seemingly impervious to volatility and sudden market declines.

 

This bodes well for businesses, as it shows in theory that a fluctuating currency can be overcome and in some case leveraged as a competitive advantage.

 

The situation is very different for entrepreneurs, however, as a number of underlying business facets are impacted when currency values fluctuate. For a start, a depreciating currency makes it more expensive to import goods, while also lowering the price of exporting. The former places an obvious squeeze on business costs, and although the latter can increase export volumes this means little if turnover stagnates and your margins suffer adversely. In short, this means more work for less money, which is a businesses worst nightmare regardless of the prevailing economic climate.

Why the Risk Posed by Fluctuating Currency Prices is Serious for Businesses

 

This is a serious concern for entrepreneurs, who must strive to adopt an agile and reactive pricing model that accounts for changing currency prices (particularly with the GBP more volatile than ever in the wake of Brexit). Without this, ventures are prone to losing money at specific junctures in time, while it can be impossible to accurately estimate margins and produce financial forecasts for the near-term.

 

For businesses with an international focus, there is another potential area of risk. More specifically, you may hold fixed amounts of currency in different accounts with which to trade, the value of which will fluctuate depending on the real-time market conditions. Let’s say that you have purchased $100,000 in USD, for example, paying a fixed amount in GBP to complete the transaction. As the value of the USD/GBP pairing continues to fluctuate, so the value of the amount that you hold in your account will change (potentially putting you at a fiscal disadvantage at any given time).

 

The key here is to restrict the amount that you hold in cash, of course, at least until the financial and forex markets begin to benefit from greater stability.