23 01 19 - MARKET UNCERTAINTY

Over the past few weeks we have seen an array of changes in the Global financial markets.

The FTSE is currently down at 6,861 compared to a 2018 high of 7,860, representing a fall of 12.7%. The US partial shut down of Government is having an impact on markets and according to Goldman Sachs, global policy uncertainty stands at record levels.

This morning, we are waking up to learn that Japan has released weaker than expected trade data for December and there are continued fears of a China Slow Down and what impact this would have on the Global economy.

At home in the UK, the continued issues around Brexit also continue to create yet more uncertainty.

Given that we live in uncertain times, all of the "unknowns" can and is having a significant impact when dealing with cross border transactions as highlighted below:

EXAMPLE:

The impact of the currency changes on selling USD to buy a £5m UK property or investment is shown below:

Source: NetDania

1) On 3 January 2019, I would have needed around $6.27m

2) Today on 23 January 2019 (at the time of publishing), I would need around $6.50m

3) Pre Brexit, I would have needed around $7.5m!

Unhedged, I could be facing significant fluctuations on a transaction.

The potential for significant losses, or indeed profits, is a lot higher on bigger ticket transactions. The impacts are also quite considerable even on a £10,000 transaction.

WHY HEDGE AND WHAT IS IT?

The benefit to hedging is simple - it locks in a fixed rate for a set time period.

If you know that you are buying or selling an asset overseas with a different base currency to your own, you are able to hedge the rate so that you know precisely how much you need to pay, or will receive - to the penny.

There are downsides of course as a deposit may be needed, but in most corporate cases zero deposits are easy to achieve. The key downside and risk to hedging is being "margin called".

A Margin Call is where you lock in a rate and it goes against you. Subject to your credit limit, you may be asked to top up or pay funds on account until either the trade completes or the rate goes back in your favour. This is then returned to you at the end of the trade period, or when the rate goes in your favour.

The plus side however, in my opinion, far outweighs the potential short term downside as you will know exactly how much your transaction is worth.

There are no direct additional cash costs to entering into a hedge and no fees to pay. Any deal and transaction costs are factored into the FX rate offered.

In my opinion, this makes cash management and financial planning much easier with far less risk.

CONCLUSION

Leaving your currency considerations to the last minute can have costly financial implications when executing cross border transactions. 

With significant experience in the financial and global currency sectors, Salamanca Group's Foreign Exchange offering provides specialist consultancy services tailored to meet our clients’ currency needs. We offer individual, transparent solutions for over 140 currencies including all of the major world currencies and most emerging market currencies.

For more information please contact me at l.camp@salamanca-group.com