Will Rylance was enjoying 2016. Velusso, his cycling holiday business which persuades mainly British-based velo-junkies to part with about £2,000 for an upmarket long weekend of riding with an ex-pro in Belgium or Majorca, was just getting going. Then the Brexit vote arrived.
Brexit does not just make him fret about imponderables, such as whether there will be European travel restrictions. The pound’s more than 10 per cent drop against the euro and almost 20 per cent fall against the dollar since the referendum has forced him to think about how to spread the risk, and whether to hedge against further sterling volatility.
“We could purchase forward contracts and lock in a rate for 24 months. It depends on future bookings,” he says. “At the moment, there is no real obvious advantage to hedging.”
Twelve months ago, with the vote on EU membership approaching, the best piece of advice for UK companies with significant foreign currency exposure was to take out hedges against potentially violent swings in sterling.
The quest to avoid currency risk remains urgent because many sterling hedges that were taken out ahead of the referendum are now expiring, according to international payments provider World First, forcing businesses to think hard about their next steps.
1. Bank of England warns of recession risk if Britain votes to leave EU
2. Strong fourth-quarter GDP figures show how UK economy has defied economists’ pessimistic Brexit forecasts
3. Rising fuel costs drive UK inflation to its highest level since 2014
4. Retail and services data point to slowing UK economy
Currency hedging is still popular, but the experience of Brexit is forcing companies to consider other ways of spreading currency risk.
“Organisations are also saying, ‘do I need to hedge, or am I better off looking at longer term solutions to reduce the currency risk?’” says Duncan Brock, director at the Chartered Institute of Procurement & Supply. “Hedging is one strategy to reduce currency volatility. A lot of procurement people are looking at alternative sourcing, finding ways they can move between currencies more easily or bringing stuff onshore so that exposure is reduced.”
Consumers felt little to no impact in their pocket in the immediate aftermath of Brexit. This partly reflects businesses having entered into currency hedging contracts for as long as they could predict their future spending needs — in most cases, three, six or nine months. As their hedges close, companies must also decide whether to pass on the cost of a weaker pound to the consumer.
Since Brexit, “we have gone past that period when most businesses would have known what their purchases would look like”, says Michael McGowan, managing director of forex at Bibby Financial Services.
Homeware retailer Dunelm is one business facing this predicament. While there was little initial impact on its results from sterling’s fall, the pound’s decline is affecting its hedging profile. Dunelm was providing full hedging coverage on its anticipated costs over three months, but this was reduced to 75 per cent over nine to 12 months, while coverage beyond a year was minimal. This month it warned “we will see price pressures coming through in the months ahead”.
The forecourt has already felt Brexit’s impact, because of the very short lag in the moves of wholesale prices and pump prices. Unleaded petrol, averaging 109p a litre in June, is now at 120p.
Seasonal buying patterns of fashion retailers mean the pound’s devaluation will probably be felt in their prices from the summer. Mark Horgan, chief executive of foreign exchange business Moneycorp, says that after petrol and fashion retail, the next prices to move will be those for technology goods.
Businesses with long supply chains like the major supermarkets may be able to renegotiate terms to avoid hurting the consumer, he adds, while the cost of infrastructure projects is probably still protected.
“But the pound in your pocket is worth 20 per cent less, and nothing can stop this,” says Mr Horgan.
Businesses are becoming more worried about sterling volatility, says Jeremy Cook of World First. “2016 really went to show that if you didn’t hedge your margins appropriately, you could be under water very quickly,” he says.
Foreign-exchange analysts believe that sterling will probably avoid the dramatic plunges of 2016. Indeed, businesses share the views of several analysts who think the pound is likely to end the year near its current levels of about $1.22.
“There is optimism within our customer base that we have seen the lows of sterling,” says Mr McGowan.
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While some customers are taking out further short-term hedging contracts, others are prepared to exchange sterling at spot price, in expectation of a steadier period for the pound. There is also the costs associated with forward contracts they would like to avoid, Mr McGowan adds.
Yet last week the currency fell 2 per cent to a six-week low against the dollar, and has continued sliding this week, offering a reminder to any nervous companies that stability in currencies can prove fleeting. Companies will need to be innovative to prevent sterling’s decline becoming too burdensome.
Velusso has its own strategy for reducing currency risk. It is adding the Lake District to its choice of cycling destinations, thereby using the cheap pound as an incentive for Europeans to come to the UK.
That way, says Mr Rylance, “we just spread the risk”.