NI Trade Summit Back to Basics -Managing currency risk in uncertain times

Transcription

1 NI Trade Summit Back to Basics -Managing currency risk in uncertain times 13th June 2017 Brian Telford Head of Markets Danske Bank UK Linkedin: Brian Telford

2 Seeing over the horizon are the risks increasing? The known knowns, known unknowns and unknown unknowns 2

3 Why has the economy performed above expectations since the EU vote? The majority of the electorate voted for Brexit The UK s relationship with the EU hasn t really changed yet Brexit was not an unforeseen event Source: ONS 3

4 4

5 Percentage change (%) Rising inflation is squeezing real wage growth and putting downward pressure on households purchasing power JAN 2014 JUL 2015 JAN 2015 JUL 2016 JAN 2016 JUL 2017 JAN Real wage growth Consumer price inflation Source: ONS 5

6 Real business investment (% change) Brexit-related uncertainty is expected to act as a drag on business investment 15% 10% 5% 0% -5% -10% -15% -20% f 2018f Source: Danske Bank Quarterly Sectoral Forecasts 2017 Q1, ONS 6

7 We are forecasting economic growth of 0.8% in 2017 and 1.0% in 2018 in Northern Ireland Q on Q growth Y on Y growth Annual growth GVA growth NI UK NI UK NI UK Q (%) 4.5 Q Q Q Q Q Q Q Q Q Q UK NI Q Source: Oxford Economics Q Q Q Q Q Q Source: Oxford Economics Note: excludes North Sea Oil Q Q Q Q Q Q Q Q Q Q Source: Danske Bank Quarterly Sectoral Forecasts 2017 Q1 7

8 8

9 The funding Environment - Don t panic Plan! 9

10 The funding Environment - Don t panic Plan! It s STILL all about cash flow: Getting paid Getting paid what you expect to be paid Getting paid what you expect to be paid when you expect to be paid it You cannot make the markets move but you can manage what market movements do to your business Let the strategy not the product drive the solution!!! 10

11 11 The highs and the lows FX volatility may mean opportunities Competitive advantage in new markets FX volatility does mean threat Overseas competition Business expansion potential More expensive raw materials Alternative source for cheaper raw material or labour Growing margins Reduced margins Currency losses Jobs exported Boundaries to defend

12 So what has changed? Back to the future? GBP/EUR Jan 15 Jun 17 Source: Bloomberg 12

13 Trend analysis GBP/EUR Jan 11 Jun 17 Source: Bloomberg Source: Bloomberg 13

14 Managing Currency Risk Currency GBP/EUR forecast mid market As of June 2017 Q3 17 Q4 17 Q1 18 Q Mean Low High Forward Source: Bloomberg Please note that these forecasts reflect the consensus view of a number of Market participants at a point in time, are not a recommendation to transact and may not reflect actual rates at the various future dates. 14

15 Why it matters forecast range GBP/EUR Jan 08 Jun 17 Source: Bloomberg Source: Bloomberg 15

16 Why it matters Currency GBP/USD - forecast As of June 2017 Q3 17 Q4 17 Q1 18 Q Mean Low High Forward Source: Bloomberg Please note that these forecasts reflect the consensus view of a number of Market participants at a point in time, are not a recommendation to transact and may not reflect actual rates at the various future dates. 16

17 Why it matters forecast range GBP/USD Jan 08 Jun 17 Source: Bloomberg Source: Bloomberg 17

18 18 Don t panic plan! Developing a risk management strategy Treat it as you would any other major business risk Set out a vision or mission and identify the opportunities Identify the risks and assign responsibility for resolution Examine the alternatives Agree a strategy integrated with sales/marketing etc. Eliminate/manage the risk Review strategy periodically Key consideration - keep the approach relevant to the scale and complexity of your business

19 General - key considerations What is my strategy Am I a currency trader Should I hedge currency to support stability of earnings and grow organically Do I know my net exposure, when it arises and over what period? Is my competition in the UK or elsewhere? Will my competition face the same currency issues as me or does it give one of us more or less opportunity? How important is the exchange rate? Can I work to a budget or will each deal need individually priced? How do I do this? Will your business benefit overall from a weaker GBP, or might a weaker GBP drive up input costs or potentially increase sales? Consider where do you buy from as well as where do you sell to? In the medium to long term, do you see problems associated with trying to trade with EU customers, e.g. additional tariffs? Might you need to consider alternative markets sooner rather than later? Hindsight isn t always what its cracked up to be!! 19

20 So do I have an FX risk common assumptions and actions I invoice in GBP, I don t have a currency risk. I let my customers worry about the exchange rate, they re happy to pay me in Sterling. I just sell my currency as I get it, I have plenty of margin built in so I don t need to worry. No one else makes what I do so the premium I command removes exchange rate risk. Renegotiating prices based on exchange rate changes can help but will NOT in itself manage exchange rate risk My competitors are in the same boat as me The market is going my way, I ll be fine. Beware of Strangers bearing gifts A product that begins life or ends up in a country other than the UK carries with it some degree of exchange rate risk for someone in the supply chain!! Researc h Plan Action 20

21 Stick or twist - How do we manage risk in uncertain times? Is it safer to do nothing than do something? Back to basics: The market is too volatile to hedge risk Simply doing nothing is not a strategy!!!!!! Determine the net FX exposure (size, currency) What is the budget exchange relative to the current spot or forward market do you have one? When did the FX exposure arise this is generally the point at which to hedge to minimise risk When does it crystallise, i.e. when do you expect to get paid? If you decided not to hedge understand the risk in s opportunity gain vs. actual cost. Watch out for the best bad price syndrome!! If you decide not to hedge how likely do you think the markets will be where you need it to be when you need it to?? 21

22 Questions 22

23 23 Important information The content of this presentation is for information purposes only to help you decide whether or not it is appropriate for your business to hedge any potential foreign exchange exposure. This information does not contain any form of investment, tax or legal advice. It does not amount to investment advice or make any recommendation in any financial instruments, investments or products. It is not intended as an offer or solicitation. Before deciding whether or not to enter into a foreign exchange risk management solution, we recommend that you take independent financial advice. Spot transactions and forward transactions when used to cover a commercial position are not designated investments as defined in the Financial Services and Markets Act 2000 (the Act) and therefore do not benefit from the protections of the Act or the rules of the Financial Conduct Authority. Currency options, even when used to cover a commercial position, are "designated investments" under the Act.

24 24 Important information This is a high level promotion only, charges will be discussed on an individual level. Northern Bank Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This presentation is a financial promotion as defined by the Financial Conduct Authority s Conduct of Business Sourcebook. Danske Bank is a trading name of Northern Bank Limited. Registered in Northern Ireland R568. Registered Office: Donegall Square West, Belfast, BT1 6JS. Northern Bank Limited is a member of the Danske Bank Group. COM1571