A new report from World First reveals that many SMEs in the UK are unprepared for currency volatility following today’s vote
After witnessing months of mud-slinging, surprise leaks and unexpected twists, America will soon have its next president. And as the aftermath of the EU referendum proved, there’s a chance that uncertainty around the outcome could result in the dollar taking a tumble. But according to a new report from World First, the foreign exchange fintech, British SMEs aren’t prepared for a weakened dollar.
Having surveyed 679 senior decision makers working in British SMEs, World First revealed that forward contracts for these businesses were shortened from 90 days to 70 days in the third quarter of 2016. Businesses typically use forward contracts as a way to fix the price for something they intend to buy in the future. That price will not change even if market circumstances do, so these deals are often used as a way to protect both parties against fluctuating markets.
However, World First now warns that SMEs may have put themselves at risk by shortening the time period covered by forward contracts by over 25%. This is a particularly uncertain time to be shortening the contracts, given that it’s not clear how the markets will react to the outcome of the US election and the Federal Reserve is expected to raise interest rates in December. This means that once Christmas is over, SMEs that import from the US may be left more exposed to market uncertainty.
“Calling 2016 an eventful year politically and economically would be a bit of an understatement and SMEs have certainly felt the impact that momentous events like Brexit and an unpredictable US election have had on currency volatility,” said Jeremy Cook, chief economist at World First. “Nevertheless, it’s not over yet and as we head into a fraught US election which could bring up more surprises, UK SMEs need to brace themselves for a bumpy road ahead. We’ve seen the pound fall against the dollar by record amounts over the past few months, and for businesses without the right foreign exchange protection this can add a lot of pressure on margins.”
Given what’s at stake, we’ll be glued to the news as events unfold across the pond.