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Adam Solomon is a specialist in business foreign exchange issues at foreign exchange brokers TORfx.

The idea of this blog is to assist businesses in saving money on making or receiving payments in foreign currency. It is developed with all companies in mind from public companies with large and complex operations, to smaller companies and individuals.

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Home Opinion Business Foreign Exchange - Adam Solomon Has the Pound turned a corner?
Has the Pound turned a corner? PDF Print E-mail
Written by Adam Solomon at TORfx   
Tuesday, 23 March 2010 17:03
Or are we still on the cusp of a currency crisis?
 



At the beginning of March, the Sunday Times printed an opinion poll showing that the Conservatives lead over the ruling Labour party had dwindled to just four percentage points, invoking concern that Britain could be heading towards its first minority government since 1974. The subsequent reaction in financial markets was volatile and the British Pound tumbled to record lows against the Australian and Canadian Dollar.
 
The UK currency actually fell significantly against all of the 16 most actively traded currencies and is currently the worst performing currency of 2010 among all of the U.S Dollar's main trading partners. The Pound plunged to a low of $1.4784 against the Dollar on March 1st and economists were queuing up to speculate that the floundering currency could hit the lowest level since the collapse of Lehman Brothers in 2007.
 
Even the struggling Euro made gains against the Pound, despite the heighted concerns surrounding Greece. The EU had tentatively agreed on a bailout package for the struggling nation, as the Greek budget deficit rose above 12% of gross domestic product. - the EU limit is just 3% and speculation spread of a possible default, with Portugal, Spain and even Ireland not far behind.  
 
The inherent weakness in the Pound and the lack of appetite for UK assets as a whole was emphasised by comments from Bank of England policy maker Andrew Sentance, who told CNBC that there's "some risk of a double-dip recession".  Despite uncertainty engulfing the Euro-zone regarding Greece, the Pound remains susceptible to further selling pressure, amid speculation of a UK credit rating downgrade, further quantitative easing and the prospect of the first minority government since 1974.
 
The volatility sweeping through the foreign exchange market has caused a lot of concern to our clients, particularly companies, who have found it increasingly difficult to budget and manage their exposure through the course of the year. It's fair to say, that the Pound's performance this year relies heavily on a majority win in the election expected to be in May, as the priority has to be reining in the budget deficit.
 
In addition, the UK economic recovery hasn't been particularly strong, with data pointing to anemic growth and the lingering prospect of an economic relapse. Therefore, a company looking to budget U.S Dollar purchasing at a certain level would need a twelve-month forecast on Cable to effectively prepare for the worst.
 
Many companies would have costed their imports around the $1.60 level at the start of the year, but the U.S economic recovery surpassed the UK's modest return to growth by a considerable amount. The Dollar subsequently gained almost 7% versus the Pound and those companies would now be importing at a loss.
 
An independent foreign exchange provider could help a corporate client manage their risk much more effectively, using stop orders and forward contracts.
Imagine the appeal if a company could have secured all of the Dollars they would need for 2010 at the same rate in January, with regular monthly drawdowns at no extra cost to the client - This is a service TorFX provided in January at a rate above $1.60.

 
Last Updated ( Tuesday, 23 March 2010 17:07 )