Businesses are taking the necessary measures to mitigate the effects of Brexit, particularly when transferring money. At the moment, the Brexit deadline, is still set for March 29, while Parliament has requested an extension to Article 50. As things might become even more complicated, businesses that transfer money regularly are already taking some steps to protect themselves from financial risk.
Here we look at the effects of Brexit on corporate currency transfers along with steps your company can take to protect itself from the negative exchange rate movements.
The most obvious effect of Brexit is volatility and the fall of the pound. Particularly, if politicians fail to strike a good withdrawal agreement, the pound will possibly fall even further, leaving businesses exposed to volatile exchange rates.
While the pound surged against the US dollar and the euro, after MPs rejected a no-deal Brexit, briefly hitting $1.3380 against the dollar, the highest level since June 2018, business leaders are warning that there are still risks to the UK economy. Since there is no agreement between the UK and EU, the parliament’s rejection of no-deal Brexit “delivers very little,” Miles Celic, the chief executive of the financial lobby group TheCityUK said.
The UK’s eventual departure from the EU and the transition period that will follow, during which the details of Britain’s future relationship with the EU will be set out, also entail the possibility of further uncertainty as the Prime Minister might face a vote of no confidence.
Solutions to exchange rate volatility
Hedging is the process of locking in an exchange rate for a specific period of time. This can help businesses mitigate foreign exchange risks by locking in rates and not having to worry about currency fluctuation for that specific time. They can thus continue receiving and sending money to other countries without the fear of major exchange rate changes eating away at their funds.
However, as the situation is unstable, many businesses that want to protect their funds, will most likely hedge a small amount, so they avoid big risks and protect their money.
Considering the timing of when to convert currencies is important so that businesses can understand the risks involved.
Additionally, there are a number of transfer options which businesses should consider to use and when in order to minimize the impact of market movements which can affect their bottom line. Hedging your exposure is one such potential option.
Uncertainty will continue weighing on the pound
As the Brexit landscape remains uncertain, so will the pound’s movement. Brexit is something unprecedented, and any political development will have an immediate effect on currency volatility. It is hard to predict the timing or the kind of deal the UK will strike with the EU. A possible delay might appear for now better than other alternatives, but the UK economy is still not in a better place. Prolonged uncertainty will hurt both businesses and consumers. Dan Hanson, of Bloomberg Economics, said: “News that Brexit could be delayed is hardly good for an economy that has been struggling to maintain growth momentum in recent quarters. Business investment, especially, would continue to suffer as the potential cliff-edge scenario would likely remain within the planning horizon of companies.”
Whatever happens, the damage may be irreversible. Last month, Bank of England policy maker Gertjan Vlieghe said that the vote to leave the EU has cost the U.K. about 2 percent of its gross domestic product since June 2016. He added that businesses could only deal with an organised Brexit for which they would have ideally prepared years in advance: “The only way to reassure” businesses is to “tell people what the change is going to be, then give them several years to prepare for that…Don’t change the framework overnight.”
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