Brexit: Market volatility, trade, & managing your currency transactions
On 24 June 2016, in the aftermath of the Brexit referendum in which 51.9% of the population voted to leave the EU, the pound took a tumble to $1.33, down from the $1.50 value recorded ahead of the votes being counted. Against the euro, the pound was down 7% at its lowest point, with the Brexit vote having driven the lowest sterling value since 1985.
In October 2016, the pound fell again – this time to $1.28. Prime minister Theresa May had delivered a speech at the Conservative Party Conference on the UK’s Brexit future in which she committed to triggering Article 50 by March 2017. Despite pledging to give “as much certainty as possible” to employers and investors, the speech sparked uncertainty in the markets about the extent of a hard Brexit.
"Against the euro the pound was down 7% at its lowest point. Lowest value since 1985."
At the time, the Confederation of British Industry said that the prime minister’s announcement of triggering Article 50 had removed one question, but had “accelerated an urgent need for answers on others”. The business organisation said that the timetable pointed to an exit from the EU in 2019, highlighting the need for businesses to know “the government’s ambition on the fundamental issues of skills and barrier-free access to EU markets as soon as possible”.
To strengthen the government’s Brexit negotiating position, in April 2017, Theresa May announced that a snap election would be held in June 2017 – and markets reacted favourably. The pound reached a five-month high at almost 3% against the dollar following the announcement, signalling a ripe environment for currency transfers.
Yet, the election failed to give the government – and investors – the certainty it needed. As indications that the government would lose its majority and govern as a minority party became clear, the pound was down 2% against the dollar with market uncertainty reignited once more.
IMPACT ON FTSE 250
Market volatility and the pound’s instability haven’t adversely impacted the FTSE 100. With FTSE 100 companies investing heavily overseas, they have managed to gain from a weaker pound. For the FTSE 250, it’s been a similar story. The index has weathered the Brexit storm since the initial drop after the referendum, and reached record highs in February, March and April this year. While some analysts have cited greater certainty on Brexit as a driving factor behind FTSE 250 resilience, others have pointed to the index benefiting from international competitiveness off the back of a weakened pound.
The FTSE 250 remains attached to the UK economy however, and the index plummeted to its greatest daily drop since the referendum in June this year, coinciding with the Bank of England debating whether to increase interest rates. While the index has survived the Brexit wave so far and has fended off long-term negativity stemming from the pound’s instability, this decline indicates that the FTSE 250 is very much tied to the UK’s economic outlook, so much of which is dependent on Brexit.
"This decline indicates that the FTSE 250 is very much tied to the UK’s economic outlook, so much of which is dependent on Brexit."
THE UK’S TRADE OPTIONS POST-BREXIT
In the Queen’s speech in June 2017, the government announced that it would seek “to forge new trading relationships across the globe”, with new bills on trade and customs helping “to implement an independent trade policy” and supporting business exports worldwide.
The speech indicated an exit from both the customs union and single market, but 18 months until the UK’s exit from the EU, and negotiations have yet to turn to trade and the future relationship.
The single market allows for the free movement of goods, services, capital and people within the European Union, creating a barrier-free trade zone for the EU member countries. Membership of the single market requires subscription to the four EU freedoms and acceptance of the jurisdiction of the European Court of Justice.
Full access to the single market can be negotiated without being a member of the EU – Norway being an example. In exchange, contributions to the EU Budget must be made.
The government has affirmed on numerous occasions that the UK will leave the single market, allowing restrictions on the movement of people and divergence from the authority of the ECJ.
The customs union
If the UK negotiates to leave the single market, retention of membership of the customs union is another option for the UK. A trading bloc that removes tariffs on goods traded between the union members, the customs union sets tariffs for goods imported into the union. However, it comes with its limitations. As a member of the customs union, the UK would not have the ability to negotiate free trade agreements with other countries.
Free trade agreements
Leaving both the single market and the customs union would allow the UK to negotiation trade agreements with other countries, and the EU. However, as the duration of the negotiation process can be extremely lengthy, there are potentially serious implications for the border between Northern Ireland and the Republic of Ireland, which the EU and UK are looking to resolve. In addition, a number of obstacles would present challenges for the services industries, such as differences relating to legislation and standards between trade partners.
World Trade Organisation
Where the UK doesn’t have a free trade agreement in place, it could always rely on its World Trade Organisation membership. Under WTO rules, countries are prohibited from discriminating between WTO members, therefore the same tariffs must apply to countries in similar circumstances. In a situation where the UK hasn’t negotiated a free trade agreement with the EU, the EU would have to apply to same tariffs to the UK as it does to other WTO members
TRADE TALKS AND BREXIT TRANSITION
The prime minister’s speech in Florence in September 2017 hoped to clarify the UK’s position on key Brexit issues and find a way to advance the negotiations. May reiterated that the UK would leave the single market and customs union and argued against joining the European Economic Area, under a Norway-EU-like trade model. She instead championed an “ambitious economic partnership”, enabling the UK to be a “global, freetrading nation, able to chart our own way in the world”.
But, the government’s trade policy plans post-Brexit are far from certain, as is whether the UK will have a transitional period before leaving the EU. The government has pitched for a transitional period of two years in return for a hefty sum paid into the EU budget, in the hope that it provides certainty for businesses and ensures adequate time to formulate arrangements with the EU.
So, how will this impact currency exchange, and how can you ensure that your business thrives in an uncertain period?
MANAGING YOUR CURRENCY TRANSACTIONS
Uncertainty on trade is likely to impact fluctuations in the value of the pound, resulting in further currency pricing uncertainty for businesses involved in currency transactions. For finance leaders, knowing your associated cost in currency and reducing this cost presents a strong strategy for navigating the Brexit landscape.
For finance leaders who aren’t aware of their associated costs in currency exchange, the danger is that it’s costing your business too much. Achieving real visibility on the associated costs is key to understanding the real exchange rate – and for this, transparency is paramount.
HOW MARGINEXPERT.COM CAN HELP
marginexpert.com is the world’s only currency pricing specialist that helps businesses to reduce and fix associated currency costs in all exchange. Partnered with leading FCA regulated and authorised providers, businesses can expose inconsistent and inflated currency costs, cumulatively saving millions of pounds for businesses who are not aware of the “real cost”.
Launched in early 2016, marginexpert.com offers businesses one low transparent spread that can be applied to the mid-market rate (or cost rate) at the time of transaction placed for spot and forward contracts.
The quote offers a flat, competitive spread, relevant to the business’ chosen annual currency volume. Once finalised, marginexpert.com emails the transparent fee to you with your chosen leading provider, who will then make a direct comparison on your recent transactions and give you a projected saving on the year and going forward.
Take the uncertainty out of your currency transactions and thrive in the Brexit era by obtaining visibility into spreads and fees charged on currency exchange services, as well as benefiting from a full review of your current risk management strategy, ensuring budget rates are met.
Take the first step towards transparency now and see exactly by how much you could improve your business’ bottom line by getting your free online quote from marginexpert.com.