U.K. businesses are taking advantage of the sterling's current strength as they prepare for prepare for Brexit impacts on FX rates.
A report in The Financial Times Tuesday (May 16) said U.K. importers are increasingly hedging against forex risk as the sterling sees a bounce-back in value after a sudden slump in the immediate aftermath of the Brexit vote last year.
According to forex risk manager for JCRA James Stretton, there are three phases of sterling depreciation post-Brexit. The first is to trade through the hedges in place at the time of the vote, and the second involves businesses absorbing "as much of the cost as they can," Stretton explained.
The third is "the capitulation phase — passing on price rises to customers." Now, reports said, companies are looking to avoid that phase and "reshape their supply chains," according to the publication.
Supplier payments have been a key motivation behind FX hedging for U.K. firms. New data from the Chartered Institute of Procurement and Supply said nearly nearly two-thirds of companies have seen supply chain cost increases as a direct result of post-Brexit pound drop.
"Rising costs, driven by uncertainty and fluctuations in the value of sterling, are becoming increasingly acute, and we are only in the early stages of the negotiation," said Cips' Duncan Brock in an interview with the FT. With the strengthening sterling, long-term hedges are more easily attainable for U.K. companies, reports found.
"A good percentage of clients is considering or has locked in either short or longer-term hedges," said Bibby Financial Services' Michael McGowan in another interview.
HSBC's Danny Goldblum, meanwhile, warned that hedging is a complicated process.
"What the last year has taught us is once markets start being driven by geopolitics, it becomes much harder to hedge, and you need more flexibility in your hedging policy," he told the publication. "You don't have to act on everything, but you need the ability to respond quickly."