GUEST BLOG: The right time to buy sterling

By Barry Dowling, co-founder of TransferMate

It’s good news for Irish businesses; there hasn’t been a better time over the past 12 months for businesses operating in Ireland to buy sterling.

The euro to sterling rate has strengthened by almost 12% since December, which translates as great news for Irish importers.

We continue to see the market traders moving away from sterling following a survey from BDO which revealed that UK business confidence has fallen to a three-year low, pushing the Business Optimism Index down to the neutral level of 100.0.

Further contractions across the manufacturing sector and worries regarding a potentially looming Brexit are weighing particularly on the minds of investors, giving Irish operations an optimum window of opportunity to secure their sterling purchases as the Bank of England shows no signs of raising interest rates in the near future.

A British exit from the EU poses greater threats to the British economy than markets are currently pricing.

Goldman Sachs have suggested Sterling could fall 20% should the UK decide to leave the European Union, while ABN Amro, for instance, are warning on the GBP/USD exchange rate falling to 1.25 in 2016 due to Brexit risks.

As always with such unprecedented events, the expected impact on the currency market is constantly evolving and is up for debate.

BUT REMEMBER, IT’S ALL NOISE

It is vital to remember that exchange rate movements are an unnecessary distraction for business. Yes, a distraction.

Through prudent action and proper management of currency purchases, organisations can robustly mitigate the risk faced and ultimate exposure faced during times of fluctuations, so as to ensure that margins are not vulnerable.

… a potentially looming Brexit are weighing particularly on the minds of investors, giving Irish operations an optimum window of opportunity to secure their sterling purchases …

WHAT ABOUT THE DOLLAR?

There is now a real and present opportunity for businesses to secure risk and save money. 

Once again, for businesses operating throughout Ireland that are making payments in USD, there is a real opportunity to lock-out exposure and reap the benefits from a dollar that is weaker than it has been in three months.

An increase of interest rates by the Federal Reserve in the United States is coming on down the line – it’s not a question of if but when. All of this will feed into a stronger euro.

Forecasting three to six months from now, our view is that USD is going to rally. No doubt this is good news for businesses being paid in USD.

However, for businesses paying in the almighty dollar it is our recommendation that consideration be given to fixing exchange rates on some of that future exposure.

A STRONGER DOLLAR

Barry Dowling, TransferMate

Irish businesses expect the US dollar to strengthen. However, many are unsure of just how to prepare.

One approach is to look at roughly how much exposure they have for the next 12 months. For example, a business might know that $500,000 will be paid in the next six months.

The advice here is to cut their exposure by locking in exchange rates today for half of this risk.

This way they are not fully committing for fear that the USD may weaken neither are they exposed should it strengthen.

We are seeing USD buyers lock in exchange rates for fear of the dollar strengthening. Market sentiment on the pound is negative, so anyone pricing in sterling is looking at locking in exchange rates for fear it will only get weaker in 2016.

Importers, on the other hand, see a weak sterling as gift.

Finally, a good strategy is to set pricing according to what margin you expect and that will give you an idea of what exchange rate you are factoring into your budgets. Any movement from that should be managed as ‘no approach, is not an approach at all’.

Photo (main): William Warby