Brexit’s Looming FX Risk For SMBs

Next week, on Dec. 11, a new vote looms on Brexit, where the United Kingdom Parliament will accept or reject Prime Minister Theresa May’s proposed deal on Britain’s divorce from the European Union (EU). The draft of what’s to come spans roughly 600 pages, offering a glimpse of approval or disapproval on everything from citizens’ rights to the state of the Irish border, and to trade, of course.

To that end (on trade and specifically cross-border transactions), potential impacts for small businesses (SMBs) loom no matter which way the vote tips.

Nawaz Ali, senior currency strategist at Western Union, told PYMNTS in a written exchange that “SMBs could be exposed to significant sterling fluctuation. If the current Brexit deal passes through Parliament, GBP/USD could rally [toward] $1.30 to $1.32 and GBP/EUR could rise [toward] €1.15 [$1.30 USD] or higher.”

Should a deal not be approved, the downside risk for the pound should materialize, which could leave the door open to $1.25 or lower — testing the GBP/USD lows of $1.26 this year. Meanwhile, GBP/EUR could drop to €1.11 or €1.10.

FX As Wild Card?

There’s at least some anticipation that foreign exchange (FX) remains a wild card that needs attention. Ali pointed to the findings of the “Western Union UK FX Barometer” survey, where 49 percent of financial decision-makers said they were either “worried or very worried” about booking currency in advance, as they could be impacted by large currency swings. The “worried” percentage rises to 58 percent for those in the retail, wholesale and food sectors. In addition, Western Union found in its report that about 27 percent of SMBs said that economic uncertainty, stoked by Brexit, reigns among the biggest barriers to trade.

Yet, even amid the fretting, there seems to be some misconceptions over managing FX exposure for firms that do business across borders. As Ali told PYMNTS, some observers believe rates average out over time, and that’s a trend that does not always happen fast enough to help a company that hasn’t been hedged against fluctuations. He stated, too, that currency risk management is often not a priority for many SMBs on a day-to-day basis. All too often, he said, hedging is done as a “one-off” decision.

“This means the decision on when to ‘pull the trigger’ takes on far greater significance than it should, and can result in hesitation. Breaking down risk management decisions and transactions into smaller, more regular events makes the process easier and greatly reduces the risk of ‘buyers’ remorse,’” said Ali. Technology, of course, helps, as software offerings and platforms (such as those offered by his own firm) can help run simulations and pinpoint exposure.

Against that backdrop, if the deal passes and the pound rallies higher, costs will go down for U.K. importers. Should disorder be the order of the day, and sterling slides, a number of sectors could be affected. Among those most exposed to volatility, impact could be the swiftest in the retail and industrial sectors, said Ali. The effects would be felt up and down supply chains, he added, and “the retail sector, for example, has an average currency risk tolerance of only 5 percent.”

No surprise, then, that firms are looking to mitigate the impact of currency volatility through efforts that include FX hedging, evidenced in forward contracts, for instance.

“However, as we approach the March 2019 deadline, and as different Brexit scenarios come into sharper relief, the fear of ‘getting it wrong’ may be increasing,” said Ali, who went on to say that “more financial decision-makers are now utilizing FX Options Contracts (40 percent) to manage currency risk — slightly higher than FX Forward Contracts (at 35 percent), which are typically thought of as the most common hedging technique used by businesses.”

He told PYMNTS that “Brexit is becoming increasingly confusing for currency experts, let alone for SMBs. This increased uncertainty is leading to enhanced confusion — something [for] which SMBs don’t have the money, the time or the visibility to make sense of it all.” The limited resources at the ready for SMBs stand in stark contrast to big corporates, which may be able to tolerate or deal with swings more efficiently.