There is an old saying in the market: ‘The trend is your friend.’ The meaning is simple – when the market builds up a head of steam, don’t bet against it.
For the past week or so, the Euro has been in free fall. The CurrencyTransfer.com live marketplace has been going euro buying bananas. Well, maybe not free fall (with the increased volatility, there have been good days and bad days) but a broad brush stroke shows a move from 1.3850 to 1.4350 or 3.5% in ‘old money’.
Of course, on one side of the market this has been great news and very well received. Euro buyers have been only too happy to ignore the rioting Greeks as they “back up the truck” to settle their Euro invoices at a significant discount than 2 weeks ago.
Conversely, Euro sales have been hit hard. Any revenues due from the past two weeks will now realise significantly less when repatriated to Sterling. As an online marketplace seller, you’re faced with two choices; 1) repatriate funds, take the hit and account for it in the balance sheet as ‘exchange rate loss’ 2) play the market, wait for whatever hints of EUR strength may arrive (or GBP weakness, like we saw on the release of UK unemployment data this week) and pat yourself on the back for any upside you achieve.
But the reality is there just won’t be a 3.5% intra-day swing so you are not going to cover everything. At most, a volatile day might see a 1.5% move, which is certainly not to be sniffed at. But we have only seen this once in the past few weeks of increased volatility (and unfortunately it was when EUR sold off and weakened by 1.5%!).
So what should you do? Well, one approach which might be worth considering is foreshortening your cycles. The less time you have between fixing purchase costs and realising sale profits the less exchange rate risk you are exposed to, which can really help in turbulent times, especially when the trend is against you.
Further, you can always improve your position with a better buy-price. When settling your invoices, it pays to compare the market. The thinner the exchange rate margin taken on your deal, the better – less for them is more for you.
Whether you choose to add that extra fat to your margins, or reflect that improvement in the prices you sell at (which could lead to quicker sales), well that’s up to you. But either way, getting the best deal on your currency is great starting point.