Fri 28th Nov 2014
A Tale of Two Cities, Brian Telford, Head of Markets, Danske Bank
The last six to eight weeks have proven to be a particularly volatile time for exporters, with a shift in exchange rates bringing very different stories to two of our most important markets.
At the time of writing this column the sterling dollar had fallen from $1.72 to below $1.57 in a short three month period. This process began with nervousness around the Scottish referendum, however, in the weeks following clarification of the no vote, the drop continued.
While the vote was the initial catalyst, the shift in exchange rate has been proven to be more about the fundamentals of both economies. Economic growth forecasts remain positive for both the US and the UK over the next 12-24 months, however predictions about the pace of growth in the UK over that period have eased in recent weeks on the back of recent data releases, resulting in a compounding the recalibration of this currency pair.
In this context the weaker pound is presenting a positive situation for local companies exporting into the US, with our products costing American buyers approx. 8% less than in August of this year. Many exporters have used this currency move not only to de-risk both some existing and future currency exposures but also take the opportunity to drive sales growth through corresponding pricing adjustments.
While local companies are currently more competitive in the US, it’s a bit of a different story in relation to the Eurozone – although comparatively speaking the change in this market is less pronounced.
Three months ago we had levels of €1.25 to the pound and this has since risen to as high as €1.28. While this isn’t as big a move in percentage terms as we have seen in the US, it is set against the background of diverging economic fundamentals between the two economies and obviously takes the exchange rate even further away from many exporters notional €1.20 (perceived reasonable value) benchmark.
Many local exporters faced with this challenge are searching to find new ways to off-set risk and achieve success in foreign markets, possibly by cutting their production costs, selling into new markets or eliminating the exchange rate risk through currency netting.
Current evidence would suggest it is unlikely that we will see a magic solution to this situation in the coming months.
For the moment, it really is a tale of two cities in some respects, with a considerably more favourable landscape in the US and tougher trading conditions in the Eurozone.
Brian Telford can be contacted by emailing email@example.com or calling 028 9004 5000.