Those trading with China, either sourcing from or selling in, are probably aware of the challenges of converting currencies and making international payments. As technology has advanced and businesses have better access to Fintech alternatives to banks and traditional FX brokerages the actual process of making or receiving a payment from China has got easier, but the challenges of managing currency market risk and volatility persist. Unfortunately exchange rates still move, and if not handled correctly, this can still present a headache to businesses.
UK businesses have particularly suffered during Covid because of the Pounds volatility through the crisis. With financial markets unsure of the resilience of the post-Brexit economy to the further shock of a pandemic the Pound crashed in value in March when the scale of the crisis became apparent. It then became apparent that the Pound was trading very much as a barometer of global Covid outlook. When the global Covid situation looked like it was improving, the Pound rallied and gained value, when the financial markets got concerned by global setbacks, we saw the Pound’s value dented.
But what can we expect moving forward as the Covid impact diminishes and other factors move back into focus?
Unfortunately, the answer, at the time of writing, seems to be a little more uncertainty.
Some financial forecasts are anticipating a broad theme of US Dollar weakness enabling the Pound o gain ground against the US Dollar. The Economic and Financial Analysis Division of ING Bank for example expect GBP/USD as high as 1.46 by early 2022. This represents a move 5% higher in GBP/USD. But the danger with this is that I think it is based on an ‘out of the woods’ assumption, that Covid will continue to have a diminishing impact on the global economy.
What if other, new factors materialise and disrupt? For example, new Covid variants materialising and challenging vaccine efficacy. Whilst elsewhere instability and disruption could come from Chinese and US geo-political relations which continue to be strained. We have not seen the de-escalation of Trump era tensions that we might have expected to see under President Biden’s administration. Similarly, here in Europe we continue to see the UK and EU but heads over what the future trading relationship with the UK will look like. What impact will this have on the UK economy and how will that translate to the Pounds value?
The problem even if we assume that the pandemic is done and dusted, there are numerous other issues under the surface that could drive currency market volatility. Fundamentally we will still be in the relatively early stages of a global economy getting back up to speed from a historically unprecedented event.
Fortunately, there are measures businesses can take to help manage currency market risk. With the right help businesses of all sizes can effectively assess and mitigate the impact of moves in currency markets from impacting their profits and bottom line. So, with a future tinged with real uncertainty businesses should take these factors seriously and explore what you can do as a business to help limit the impact of future moves in exchange rates.
About the Author
Peter has close to a decade’s worth of experience managing the foreign exchange and global payment requirements of international businesses. He has worked at several large UK FX brokerages before joining Fintuitive. Fintuitive is an innovative financial technology firm based in Oxford, UK. They focus on combining the best technology with quality human expertise to help clients reduce costs and drive efficiencies when moving money internationally – If you would like to explore how Fintuitive could help your business email him on peter@fintuitive.co.uk
