How to protect your business from currency volatility and economic headwinds

The UK government’s mini-budget, followed this week by a dramatic U-turn on tax policy, has caused the pound to fluctuate against the dollar, leaving British businesses exposed to rising import costs.  

We sat down with Lee Kaznowski, Partner at Ascentis Accountants, and Andrew Josephs, Director at ADJ Business Solutions, to discuss how currency volatility is affecting UK businesses and what they can do to mitigate the risk. 

Why is the pound so volatile? 

The pound plummeted last week after Britain’s new Prime Minister Liz Truss and Chancellor Kwasi Kwarteng announced a series of economic reforms which included tax cuts funded by government borrowing. 

The cuts, designed to promote economic growth, spooked the financial markets and caused the pound to fall to its lowest ever value against the dollar. On Monday, the government U-turned on one of their key tax policies and the pound made a recovery. But this does not rule out the prospect of ongoing volatility. 

“All these markets prefer stability,” says Lee. “And the fact is there doesn’t seem to be any stability in the UK at the moment, whether that’s the war in Ukraine or the fact that we’ve left the EU through the Brexit position. And there’s clearly, at this point in time, a lack of trust in the UK government in terms of their policies and procedures. So there’s instability from three different fronts.”

“I think we’re seeing fluctuations in the pound because of an unstable government,” agrees Andrew. “Because other countries don’t have it. Everyone is going through this economic crisis, everyone is going through increased costs. But with the change of Prime Minister and the change of Chancellor, that in my opinion is why the markets are volatile.”   

What are the risks to UK businesses?

British businesses that import from the US, China or anywhere in the world where suppliers prefer to be paid in a foreign currency experience a rise in import costs when the value of the pound falls.  

“The risk comes either when the UK company has international clients or is paying internationally,” says Andrew. “That’s when the volatile currency affects invoicing. I’ve got one client that invoices in euros because their clients are European-based. They've increased the euro amount of their annual membership because what they were getting from euro exchanges was less and less.”

Even if your business doesn’t import directly or sell internationally, there is likely to be a reliance on imports somewhere down your supply chain. This creates a knock-on effect with far reaching consequences as prices rise and profit margins are squeezed. 

“When you’re dealing in multiple currencies it only takes a small change in the percentage of the exchange rate for it to have an impact,” says Lee. “I would say ordinarily, that can be both positive and negative for businesses. But at the current trajectory it just seems to be a cost, especially if you are looking to buy dollars.”

How can businesses mitigate the risk?

There are three ways UK businesses that trade internationally can protect themselves against the risks posed by forex market volatility: 

1. Pass on the risk to your suppliers and customers by operating in sterling only or increasing your prices.

2. Use forward contracts to hedge against currency fluctuations.

3. Operate through a US dollar account. 

The drawback of the first two options is that unless you have leverage, global organisations and customers are unlikely to agree to take on the risk. Suppliers may refuse to invoice in sterling and customers may insist on paying in dollars, or go elsewhere.  

The third option allows businesses to avoid currency exchange altogether when the market is unfavourable. 

“If you’re invoicing in dollars and having to pay in dollars, just maintain that cash in a US dollar account,” Lee advises. “You’re only exposed to the risk at the point of transfer to GBP. So as long as you don’t have to exchange to GBP, you don’t lose or gain at that point in time.”

Here is where Airwallex can help businesses that operate across currencies. Say you’re an international eCommerce business. By opening a US dollar account with us, you can collect dollars from your US customers, hold those dollars in your account, and use them to pay international suppliers when needed using our Borderless Cards and Transfers. You can also wait for the exchange rate to become favourable, and exchange your dollars to GBP at a point when it benefits your business.   

“I have clients that have saved money on FX because they are using Airwallex,” says Andrew. “My clients that work in multiple currencies, spend money in multiple currencies and need to travel have all seen a benefit in the ability to forward plan.” 

How Airwallex can help businesses hedge against currency volatility 

Airwallex allows businesses to open multiple foreign currency accounts for free, online, at the click of a button. 

By opening multiple foreign currency accounts, including US dollar, Euro, Chinese Yuan and more, you can protect your business against fluctuations in the forex market. 

“Our main advice whenever you deal with international trade — and this was our advice before the currency problems we’ve been having — is to limit the amount of times you have to convert currency,” says Lee. “Because every time you convert currency it will always cost you, even if you get a good rate. So setting up international bank accounts, and Airwallex is a great platform for setting up a number of international bank accounts, you can control the cost. You can choose when you want to change your money back into sterling.” 

Pranav Sood, GM, Airwallex EMEA says: “In uncertain times, businesses operating across borders need the right financial infrastructure in place to shield against market volatility. Airwallex gives businesses the freedom to scale globally without exposing themselves to unnecessary risk. With our solutions in place, they can collect and spend in multiple currencies whilst limiting currency exchange, and the anxiety that comes with it.” 

To set up an Airwallex account today, sign up free or speak to one of our advisors.