Centtrip
With the pound at rates not seen for a decade, deciding on how best to manage the situation for companies in the plastics industry can be a challenge. Here, Miles Eakers, Chief Market Analyst at London-based Centtrip, shares his insight.
Britain voting to leave the European union last year led to the Pound to drop by over 20 percent.
The decline of the Pound made British goods and services considerably cheaper and themanufacturing industry has benefited significantly from this. Order books have swollen, with recent data suggesting manufacturing has reached its highest level since 2011. Thetheoretical discount resulting from the drop in sterling has led to growing demand for UK based products in a shift from what was traditionally a service-led economy.
As the Pound falls this makes UK products cheaper overseas and allows UK manufacturers to be more competitive than their overseas counterparts. It’s not all good news though, far from it, the cost of raw materials imported from overseas become more expensive, stoking inflation. The ratio of import cost to export revenue will be the key factor when determining if the fall in the Pound has been beneficial.
With the Pound hovering close to levels not seen since 2010 against the Euro and marginally higher than levels not seen since the late 1980s against the Dollar, it may be that the Pound doesn’t remain at these low levels for much longer. Despite Brexit negotiations still ongoing, it’s likely that a deal between the UK and the EU will give some certainty to the future and give the Pound a boost.
The ongoing political fears in Europe and the upcoming German and Italian elections could see weakness in the coming months for the Euro. Across the Pond in the States, growing geo-political tensions on the Korean peninsula and increasing uncertainty around Trump may weigh on the Dollar. This could see the Pound return to levels more traditionally associated with Sterling.
For those selling the Pound before the Brexit referendum the ability to hedge in a rate close to €1.30 against the Euro looks very attractive now. Many felt that the referendum would result in a victory for the remainers, this wasn’t the case, and, as ever with major risk events, it’s important to hedge against currency exposure. The same is true now.
With the Pound at a historically low level, this offers an exciting time to hedge against the Pound increasing in value. In manufacturing the need to hedge is often over a longer period that requires more than just one spot conversion. This opens up the use of ‘forwards’, which allow users to lock in a specific rate for conversion at a set data in the future. Knowing this rate is locked in, this can mitigate any violent swings in the currency markets and protect key profit levels for business.