Even before the people of the United Kingdom took the momentous decision to exit the European Union, the recent history of the sterling exchange rate was extremely volatile. As recently as November 2015, the euro was trading at below 70p sterling. By October 2016, four months after the Brexit vote, it was trading above 90p. That represented a 28.5 per cent weakening in sterling in less than a year.
That said, it is worth noting that the euro hit 98p in December 2008 and as recently as 2013 was trading at 87p. We are therefore not in alien territory where quite extreme fluctuations in the currencies are concerned. However, the recent volatility has perhaps been magnified in the public consciousness by the sheer volume of column inches and coverage devoted to Brexit.
The fact remains that the level of trade between the islands has not been affected as yet. But, of course, the negotiations between the EU and the UK will dictate what hurdles might be put in place in the future that may threaten to reduce the level of trade we conduct with the UK. Given the fact they are one of our largest trading partners with more than €1 billion worth of goods and services traded between us every week, the end result of negotiations could have a potentially seismic impact on Ireland’s economic fortunes.
In the meantime, however, it is the UK consumer who is feeling the pain of Brexit. UK inflation is now running at a four-year high of 2.9 per cent, with the weaker pound resulting in consumers paying more at the till for the myriad products imported from outside the UK. UK pensioners living in Europe are seeing their monthly cheques not stretch as far as they once did.
From an Irish perspective, retailers here may find themselves under pressure from their competitors in Northern Ireland, with shoppers happy to drive north to take advantage of the weaker pound. The tourism industry here may also start to see a fall in visitors from the UK due to the increased cost of visiting Ireland.
Volatility in exchange rates has been a feature of the market for many years and it is unlikely to recede at any stage in the future. All anyone can do, be they a company or an individual, is to try and put in place some measures that will serve to manage and mitigate the foreign exchange risk they are exposed to.
An Irish company exporting to the UK may find current rates of exchange to be challenging, but it is prudent to safeguard themselves against further adverse moves by locking in some of their exposure now, as opposed to simply hoping things turn back around. A company can do this by entering into a forward contract, where they can agree to sell a specific amount of pounds and buy euros at an agreed rate for a specific date in the future.
Peace of mind
This can give the company peace of mind on at least a portion of their future exposure. Any company with such an exposure can and should draw up a hedging strategy. This is equally important for businesses importing goods from the UK and paying suppliers. Regardless of what side of the currency fence you are on, complacency should be avoided.
Individuals tend to face FX exposures on a smaller scale across a shorter time span. They may, for example, be selling a property in the UK and be concerned that the euro value of the sterling proceeds will be reduced should the pound weaken further. Individuals can employ similar tools as those used by companies but it is very important to note that they should never try to manage or hedge a foreign-exchange exposure for anything that is less than 100 per cent certain. A property sale could fall through, for example, so the last thing anyone should do is lock in a foreign-exchange contract on something they might not actually need.
Regardless of whether Brexit happens in the end or what form it takes, the foreign-exchange risk will remain and any company or individual who is exposed to the vagaries of the foreign-exchange markets should do their best to manage this risk. There are a variety of tools they can employ to do so and the driving force behind the steps they take should be to introduce certainty and minimise stressful surprises.
Gerry Gallen is senior manager with Moneycorp Ireland, a corporate foreign-exchange specialist delivering tailored hedging strategies to companies operating in Ireland