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Five tips for managing currency risk ahead of the US election

With the US election only three weeks away, Alex Edwards, head of the corporate desk at UKForex, gives his five top tips for managing currency risk, whatever the outcome

With the US Presidential election now less than three weeks away, the majority of polls and pundits agree that a victory for Hillary Clinton is the most likely outcome. However, just months after the shock Brexit vote, it would be foolish to rule out a surprise result in what has been possibly the most unpredictable election campaign in the modern era. Although we can predict that currency fluctuation will be more extreme should Trump win, a Clinton presidency will not protect the dollar completely from instability.

This uncertainty suggests unstable times ahead for American businesses, and the effects on British businesses, particularly those in the IT sector, should not be overlooked. With many IT businesses and resellers reliant on trade with the US, it is important that they take steps to protect themselves from one of the potentially detrimental fallouts of the result – currency volatility.

Currency exchange can be fraught with difficulty under normal circumstances. Brexit proved that in the current political climate, all businesses have to be vigilant, ready for any scenario. Here, Alex Edwards, a currency expert from UKForex, a firm specialising in foreign exchange, provides some insightful advice for IT business owners looking to arm themselves against turbulence in the dollar.

What are the benefits of a currency strategy?

The short answer to this is that a currency strategy, provided by an expert in the field, will save your business money.
If a business is not protected against currency shocks, sudden changes in exchange rates can severely impact profit margins – and sometimes even push a company into serious trouble.

But you don’t need to be a victim of market movements, even though they are outside your control. There are a number of currency tools that, when brought together into a robust strategy, can give your business a buffer against unexpected rate changes.

Forming a robust strategy

There are three tools that, when brought together, can help you to build a robust currency buffer for your business: forward contracts, limit orders and spot trades.
Forward contracts provide long-term security by locking in today’s exchange rate for a future date. This way, you’ll know exactly what rate you’re going to get in six or even twelve months’ time, and can plan business around this. With currencies constantly moving – and sometimes dramatically – forward contracts can help to manage risk and avoid the volatility that can eat into your bottom line.

Limit orders are an automated service that allows you to maximise your returns by setting a target exchange rate for international transfers. Once the target exchange rate is reached, your funds will be transferred – this is a good option if you have time to wait before moving money from one currency to another.

Finally, spot trades are the simplest form of transfer – made on the day, at the current exchange rate. Depending on your company’s appetite for risk, you may want to set some funds aside to be traded in this way, protecting another percentage of your funds with a forward contract. This way, you won’t miss out if the exchange rate does move in your favour – but you have to be willing to take on the risk.

Surviving the election

Keep track of the campaign as it enters its final days, as pre-election polls have also been known to affect currency –and do make sure you consider how any surprises might impact on your currency dealings. If Trump wins, we are likely to see USD weaken on the back of the uncertainty his administration will bring. Controversial policies such as the planned wall along the US/Mexican border will rattle markets, and such an extreme change in leadership could cause the Federal Reserve to hold fire on an interest rate rise in December, again affecting the dollar.

If, as the polls are now suggesting, Clinton prevails, then the dollar should rally. Markets don’t like uncertainty and another Democrat in the Oval Office will create a smoother transition, avoiding the potential chaos of the super-liberal Obama giving way to the extreme-hard-line Trump.

A robust currency strategy can prevent the dollar’s movements having an adverse effect on your business so it is well worth investing some time in getting this right.

Consider your supply chain

You’ll be affected by movements in the dollar if you’re selling to the US, but also if you’re buying from it – as a result, it pays to consider how currency could impact your business in both directions.

Even when you aren’t faced with major events like a controversial national election, if you do import any of your products from overseas, it’s important that you pay attention to the impact of currency on your supply chain. It could likely benefit from the support of a currency specialist, with access to better exchange rates – if you’re paying for goods at a preferable rate, you could give your profit margins a significant boost.

Finding the right payment provider

Since the dollar currently faces a period of heightened instability, it is likely to be subject to fluctuation in the coming months. Remember, there is nothing ‘normal’ about the current political and economic climate and the effect this could have on currency.

When looking for an international payment provider, remember that pricing models vary between firms, and always shop around for the best deal. Exchange rates may look good, but beware of sign-up fees, monthly subscriptions and hidden transaction fees, as they will eat into your returns.

The best option is to speak to potential providers and ask them to provide you with a quote, once you’ve explained the particular needs of your business.

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