(22 June 2020 – United Kingdom) Failure to hedge the pound is heaping more pressure on the UK’s top companies already tackling COVID-19 and Brexit according to new East & Partners research.
Many firms have lost tens of thousands of pounds in the last six months alone and risk losing more if they fail to act.
- 80 percent of UK businesses market wide have experienced currency losses in the past six months
- Average currency loss for British companies with a turnover of up to GBP100 million is GBP52,200
- Research based off interviews from 2,215 British importers and exporters
UK corporates that allow FX market forces to determine the cost and value of their FX transactions are gambling away their profit margins as macroeconomic pressure in the UK economy, trade uncertainty and the coronavirus pandemic have created extreme swings in the value of sterling against all major currencies.
East & Partners (East) has for the first time measured this loss gap between UK corporate’s currency forecasts and exchange rates. In December 2019, East conducted direct interviews with CFOs and corporate treasurers on their exchange rate projections for June 2020 made in December 2019 and actual cross rates. East’s research reveals wide discrepancies between forecasts and actuals.
The average currency loss in the last six months for UK businesses across all currency pairs traded (including hedged and unhedged transactions) was £19,000. Furthermore, East’s analysis reveals that 80 percent of UK businesses market wide have experienced currency losses in the past six months.
Lower corporates (those with an annual turnover between £20 million and £100 million), with their higher value trades, incurred substantially higher losses with even the slightest deviation away from the true exchange rate value. As a result, the average currency loss was £52,200, 172 percent greater than the market average.
Based on 2019 forecasts, some mid-size companies witnessed up to six percent deviations above actual value on sterling against the US dollar. Smaller companies are typically those with the highest overkill, with forecast deviations as high as ten percent.
Similar outcomes were also true for sterling against the euro. On average, total market forecasts were one percent above the actual exchange rate value. Yet for the micro segment forecasts were two percent above actual value and lower corporates two percent below.
“Since Brexit, both the UK and European Union have suffered severely. With the transition period underway, importers and exporters still face significant trade barriers. As a result, exchange rate predictions have been extremely difficult under these conditions, making unhedged FX transactions one of the biggest risk factors for UK enterprises today” stated East & Partners Europe Market Analyst, Pierre Sokoya.
Even for companies who have implemented hedged FX transactions, many are still exposed to losses if currency pairs move in an unfavourable direction, defined as ‘underhedged’ positions.
Currency Loss
GBP thousands
Although it is common to assume that larger sized corporates should be substantially better equipped at managing their FX exposures, in reality smaller businesses appear to have better leveraged external expertise and technology offered by Fintechs to better position themselves in the market.
“As the FX market becomes more erratic due to global trade barriers and economic uncertainty, those best positioned to manage these risks fundamentally integrate technology, analysis and experience to derive a coherent outlook of future market conditions”, says Sokoya. “FX hedging levels are increasing in the UK market, particularly the use of forwards, but this really does need to accelerate given these loss numbers,” he added.
About the research
East & Partners’ Global Business Foreign Exchange (BFX) program tracks the relative competitive positioning performance of domestic banks, international banks, and non-bank providers. The analysis provides an accurate monitor of relationship share, wallet share, customer satisfaction, customer advocacy and mind share across Spot FX, FX Options and Forward FX.
Based on direct interviews with a large representative sample of 2,215 UK importers and exporters, the demand side analysis closely monitors all BFX providers as nominated by the randomised sample of CFOs and corporate treasurers included in each round’s sample. The analysis conducted continuously since 2014 also provides strategic insights based on key drivers of BFX customer needs.
Released Biannually: June and December
Business Segments:
Lower Corporates – £20 -100 million
SME – £5 – 20 million
Micro – £ 1 -5 million
About East & Partners
East & Partners is a leading specialist business banking market research and analysis firm. The firm’s core expertise is in the provision of analysis and advisory services tailored for the commercial, business, and institutional banking markets across Asia Pacific, Australasia, Europe and North America. For more information or further interview-based insights from East & Partners on the BFX program, please contact:
| Pierre Sokoya | Daniel Flatt | |
| Europe Market Analyst | Europe and US Lead | |
| t: +44 203 889 4281 | t: +44 7729 970 731 | |
| pierre.s@eastandpartners.com | daniel.f@eastandpartners.com |