Brexit fears stoke UK business FX risk management engagement – but is it too late?

As the United Kingdom’s (UK’s) departure date from the European Union (EU) becomes more uncertain and delayed, businesses and investors are becoming increasingly anxious. CFOs, corporate treasurers and business owners are allocating significant time and resources planning for a worst-case ‘Hard Brexit’ scenario without understanding the full extent of what this worst-case scenario fully entails.

As future trade relations with the EU have been unclear since the initial Brexit referendum in 2016 and remain unclear today, key economic indicators such as employment, inflation, trade and growth remain unsettled.
Brexit has featured as the main topic of discussion for media outlets and news reports across Europe and the globe as a result of the potential ripple effects stemming from the UK’s exit from the EU almost five decades after it joined the then European Economic Community (EEC) in 1973. Yet the more discourse that surrounds the protracted divorce proceedings, the less confidence the media seemingly has in it.

As large multinational corporates all the way down to Micro businesses await with bated breath effectively expecting the unexpected, a key question that arises is, ‘are hedging ratios for corporates as high as they should be given the level of potential volatility?’

In this challenging environment, UK businesses have had to cope with a volatile Great British Pound (GBP). Leading up the initial Brexit referendum in 2016, the GBP volatility index*, or otherwise known as the ‘fear index’, jumped by an astonishing 180 percent. In the latter part of 2017 the volatility index fell by four percent and as of H2 2019 the index is firmly higher by up to 40 percent.

Recent currency forecasts conducted by East & Partners (East) in H2 2019 reveal that enterprises with £1 - £5 million annual revenue hold a distinctly bullish outlook for the value of the GBP against key currency pairs for the six months to June 2020. In contrast, larger sized corporates project the GBP to fall by a considerable margin. The surprisingly high level of variance in six monthly forecasts between SME and middle market segments is a defining characteristic of East’s global currency forecast analysis, capturing rolling six monthly forecasts across a basket of major currency pairs by Australian, Asia, European and North American importers and exporters.


Historically, East has found larger businesses to be more accurate in forecasting currency exchange rates within a six-mouth interval compared to smaller firms. Therefore, it seems as if the GBP recovery is set to be short lived. Increased currency volatility can have profound effects on corporate supply chain operations as imports become more expensive.

Nevertheless, as the UK faces a general election on the 12th of December 2019 and an extended Brexit deadline on the 31st of January 2020, without a set-in-stone trade agreement with the EU - the UK’s biggest trading partner - GBP price action will become highly volatile.

Due to this uncertainty more businesses in the UK are engaging with risk management products such as FX Options and Forward FX. Recently released data from East & Partners long running Global Business FX research programs highlight just how much businesses of all sizes are ensuring that their downside currency risk is mitigated.

Since 2016 FX Options penetration has increased by 11.8 percent for Microbusinesses and 19.6 percent for SMEs while FX Forward penetration has expanded by 14.8 percent and 24.2 percent respectively. Lower Corporates have geared up regular use of both FX Options and Forwards by 14 percent. As smaller businesses level of engagement with appropriate FX risk management solutions proceeds at a slower rate relative to larger internationally trading enterprises, they run a greater risk of potentially highly damaging FX losses.



Nevertheless, as more businesses engage with risk management products and transition from infrequent to regular usage, the proportion of their hedged FX turnover has also been characterised by a discernible upward trend market wide.

This data-based insight infers that UK firms are deciding to hedge a higher proportion of their FX turnover on a six-month interval irrespective of their prevailing trade profile. Both importers and exporters are turning to their bank, and increasingly non-bank FX providers, for advice and support in managing heightened FX price volatility.

Both banks and non-bank FX providers will be tested in the event of a sudden correction in the GBP, leading many corporates to review their FX risk management relationships. Following the initial 2016 Brexit referendum, World First closed its FX Options trading desk in 2017, transferring staff to other divisions of the group. East & Partners research reveals although Monex and Western Union are the largest UK non-bank FX Options providers, relationship share growth has been constrained in the face of resurgent growth by incumbent majors including HSBC, Citi, Barclays and Bank of America.

Both Monex and Western Union have had greater success competing for new Forward FX relationships among Lower Corporates and emerged as popular secondary Forward FX providers noting a lack of usage for both Options or Forwards by Microbusinesses and SMEs.

Small business owners, whether importer, exporter or both, are hedging less than 50 percent of their total FX turnover despite costly hedging losses incurred in the wake of the ten percent GBP/USD depreciation in 2016 to 30-year lows in the wake of the Brexit vote.

East & Partners research reveals how vulnerable smaller businesses are within the current political and economic climate permeating financial markets. Despite significant regulatory and compliance entry costs, there is a clear opportunity for non-bank FX providers to engage risk management products and tools that small businesses require in order to minimise their risk profile within their trade and supply chain operations – a section that has been traditionally neglected by banks. After all, today’s small businesses are tomorrow’s institutional enterprises.


* - CBOE/CME FX British Pond Volatility (BPVIX),

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