The foreign exchange markets have become more and more liquid over the years as global trade has increased, with a daily volume of US $5.3 trillion. The increase in international trade presents some exciting opportunities for both large and small companies across a wide range of industries. For people working in creative industries, it could open up possibilities for international collaboration – and increase access to overseas funding.
But, as last year demonstrated, foreign exchange exposure can also present risks if the rate moves against you. And because exchange rates are a ratio between two currencies, fluctuations can be caused both by events both at home and overseas. So if something happens overseas to strengthen a country’s currency, the Pound can weaken as a result. This can have an impact on costs and profitability for companies that need to make payments in foreign currencies.
Chris Towner from international payments specialists HiFX discusses these issues further and specifically how they could impact the UK Film and Production sector.
BC: What is the main cause of currency fluctuations?
CT: Political and economic events both in the UK and overseas can cause exchange rate fluctuations, which can impact how much it costs to make foreign purchases, how competitive companies can be in foreign markets and how desirable companies are to overseas investors.
For example, in the aftermath of the UK’s vote to leave the European Union, the value of the pound against the dollar fell 12 per cent within hours. Three months later that figure had reached 15 per cent. That can be devastating for a business with exposure to foreign currencies.
But there have also been events that have helped to boost the pound. For example, there have been some fluctuations in the US dollar as a result of Donald Trump’s actions since he became President in January, and again following a less positive than expected message in a recent US Federal Reserve announcement.
Meanwhile in Europe, the pound experienced a boost against the euro in the run-up to the recent elections in the Netherlands, where there were concerns that far-right candidate Geert Wilders could gain ground.
BC: Can we expect similar uncertainty throughout the year?
CT: There could be a similar effect around the French elections in April and May, and then the German elections in September.
However, there is always the risk of an ‘unknown’ event, which would also impact currency. These events, (sometime referred to as the known unknowns!) such as natural disasters, terrorist attacks and unannounced Central Bank decisions pose a risk to the currency markets.
And as Brexit negotiations progress, these also have the potential to cause fluctuations in the currency markets as investors in the foreign exchange market are likely to be closely following developments.
BC: What is the potential impact on the film and media industry?
CT: If you need to spend money in another country, perhaps to purchase equipment from a foreign provider or if you are planning a trip to an overseas location, the recent weakening of the pound means this could become more expensive for you than it would have been this time last year.
For example, if you needed to pay an invoice to a US supplier in dollars when the pound was at its lowest point in January you may have ended up paying almost 20% more than you would have done 7 months earlier.
BC: Could currency volatility impact funding into the UK film and production sector? Will investors shy away from the UK?
CT: The weaker pound could potentially make the UK an even more attractive place to invest, as currencies such as euros and US dollars are stronger against the pound so foreign investors could get more for their money. Also, given our film industry is exported overseas, we could also look to benefit from the weaker pound by offering lower cost services.
BC: What steps can a business take to protect itself from the impact of currency volatility in the future?
CT: The first step is to understand your exposure and the potential risks to your business. Once you have an understanding of this, you can develop (or review) your company’s Foreign Exchange policy to ensure you have a plan in place, whatever happens next. Then you can start to take a look at the various products on offer that could help you mitigate your risk – these include forward contracts, FX options and FX structured products. These products have all been designed to help companies hedge their risk in different situations. The best time to develop your policy is during calm markets – try not to react to events but plan for them in advance.