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UK companies use pound strength to hedge forex risk

The pound may not yet have risen beyond $1.30, but for Norfolk-based picture frames maker Nielsen Bainbridge there is no time to lose.

Last week, it purchased sterling hedges worth €950,000 and $650,000 against the euro and the dollar, which mature at the end of the year, taking advantage of the recent recovery in the pound. “We took advantage of the rise in exchange rates,” says finance director Sarah Burdett.

Sterling’s newfound strength is a relief for UK importers such as Nielsen Bainbridge, enabling them to pick up the phone to forex specialists for the first time in months to discuss sterling hedges — a trend now being widely reported by currency hedging advisers.

Yet the pound’s post-Brexit decline from $1.50 has been a test of nerve for Nielsen Bainbridge and many other importers. The company’s suppliers are located in Europe or China. “Currency therefore has a big impact on our business and the margins we can obtain,” says Ms Burdett.

When the pound was stronger, Nielsen Bainbridge could hedge sterling over three months to cover short-term currency needs. Currency hedges enable institutions, business and individuals to lock in an exchange rate over a certain duration regardless of how the rate moves in that time.

Then came Brexit, which Ms Burdett says delivered an “unexpected shock”, driving up costs which forced it to raise prices.

This is the third of three phases of sterling depreciation experienced by UK companies since Brexit, says James Street at forex risk managers JCRA.

Phase one is trading through the hedges they had in place at the time of Brexit until the costs of the pound’s decline fully registered. The second is the attritional phase, when companies “try to absorb as much of the cost as they can”. Phase three is “the capitulation phase — passing on price rises to customers”, says Mr Stretton.

A lot of companies appear to have been through the first phase, putting off worries about sterling’s fall until closer to the moment when their hedges expired.

Many companies are now striving to avoid the capitulation phase, focusing on how they could reshape their supply chains. The Chartered Institute of Procurement and Supply says nearly a third of managers were looking to shift from EU to UK-based suppliers. Nearly two-thirds have seen their supply chain costs rise because of the pound’s post-Brexit fall and 36 per cent are trying to drive down supplier costs.

“Rising costs, driven by uncertainty and fluctuations in the value of sterling, are becoming increasingly acute and we are only in the early stages of the negotiation,“ says Duncan Brock of Cips.

Amid such flux, companies are taking profit when they can. Before last week’s hedge, Ms Burdett would buy currency as soon as Nielsen Bainbridge confirmed a large ad hoc order, in order to fix costs.

Longer-term hedging strategies seemed out of the question in January when the pound hovered around $1.20 and forex analysts forecast further declines.

Imagine a company which had budgeted for sterling to be at $1.40, says Mr Stretton. Did it hedge sterling at $1.20 or stay unhedged amid continuing sterling uncertainty?

Remember that only a few months ago banks were forecasting the pound down to $1.10 or even parity, he adds.

That is now changing, as the pound threatens to break $1.30 and analysts revise their forecasts upwards. In boardrooms and treasury offices, the pound’s rise offers companies the chance to rethink budgets.

“If you’ve got a budget rate at $1.40, hedging at $1.30 is only 10 cents off where you were planning,” says Mr Stretton. “Depending on competitive pressures, some firms are probably of the view that, close to $1.30, you can trade through this.”

Hedging activity may be on the rise again, and the UK corporate mood is a bit brighter. “A good percentage of clients is considering or has locked in either short or longer-term hedges,” says Michael McGowan of Bibby Financial Services. Some of its clients even ask why, if sterling is rising, they would want to be locked in to a hedge.

They should take heed. “Sterling is still some 15 to 20 per cent from where we were pre-Brexit, so companies have the same sort of issues, says Danny Goldblum, head of HSBC’s CMB sales.

Hedging has not become much easier, he adds. “What the last year has taught us is once markets start being driven by geopolitics it becomes much harder to hedge and you need more flexibility in your hedging policy. You don’t have to act on everything but you need the ability to respond quickly,” says Mr Goldblum.

Importers will welcome the pound’s rise, says Rudi Alexis, head of corporate FX distribution at Barclays. “It gives them a bit of respite, but they are not out of the woods whatsoever,” he says.

Ms Burdett is certainly not getting carried away by the pound heading for $1.30. Brexit may have stabilised in the short term, “so it doesn’t affect my decision making at the moment.

“But come budget period and trying to plan for next year it will be an issue and will take a prominent role in currency conversations and what action will be taken to minimise any negative currency impact.”