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Rebound in pound prompts revival in hedging

UK companies have responded to the pound’s recent rebound to close to $1.30 by taking out new sterling hedges.

Sterling is the best-performing G10 currency against the dollar this year, boosted by Prime Minister Theresa May’s decision on April 18 to hold a snap general election, prompting analysts to predict a breach of $1.30 for the first time since September.

The pound fell as much as 22 per cent after the Brexit vote in June, dipping below $1.20 in January. That had been weighing on importers, particularly retailers, who regularly need to sell sterling to pay for materials from overseas.

Companies were reluctant to take out hedges when sterling was so low, while those whose hedges were expiring were faced with passing costs on to customers, absorbing them or renegotiating supply terms.

But forex hedging advisers are reporting a pick-up in activity as finance directors reassess budgets in light of the rise in the pound, which climbed 3.2 per cent in the two weeks since April 18.

James Stretton, of forex risk managers JCRA, said sterling’s elevation was having a “psychological” impact on companies, leading clients to return to hedging.

“There’s a big psychological difference between $1.20, which is just so low that a lot were very reluctant to sell sterling down there, and $1.30 or close to it,” he said. “At these slightly better levels, people are more comfortable.”

Payments provider World First recorded a 120 per cent increase in clients hedging their sterling liabilities in the week after the general election was called, and said hedging durations, which had fallen to seven weeks in March, were now averaging three months.

Barclays reported that some UK retailers were putting in hedges for 2018 for the first time since the Brexit vote.

“We anticipate demand will remain, some are waiting for sterling to go above $1.30 to re-enter the market,” said Rudi Alexis, Barclays’ head of corporate forex distribution.