British currency policy ‘helps exporters’
“Irish exporters to Britain will hardly have taken heart from the recent decision by British chancellor Gordon Brown to postpone a referendum on sterling entry to the euro,” she said.
The Chancellor has made a commitment to re-examine the five economic tests for euro entry next summer.
However, this is being interpreted as a political move rather than an indication of any great belief that the tests will actually be met.
“The one possible piece of good news for exporters from the decision is the declared optimum euro-sterling entry level of 0.7300. This rate should now be seen as a target or anchor rate for sterling, with little likelihood of the currency deviating substantially from this level,” said Ms Kingston.
Bank of Ireland’s forecast is for sterling to finish the year at a level of 0.7000.
“The recent weakness of sterling highlights the need for any exporter to have a currency hedging policy in place,” said Ms Kingston.
“Firstly, it is important to be aware of the exchange rate required, in order to achieve the desired profit margin on their product or service.
“Exporters should build a hedging policy around this exchange rate using the expertise of their bank’s treasury division. Typically a company policy will be to use spot transactions, forward contracts and currency options, or a mixture of each.
“Companies can also place ‘orders’ with their banks to sell a pre-determined amount of currency if a desired exchange rate is available in the market.
“A growing number of companies are invoicing their British customers in euro, effectively transferring the foreign exchange risk onto their customers.”
“However, these companies should satisfy themselves that they are getting the best possible deal using such a strategy. It may transpire that they could negotiate a better rate for selling sterling with their Irish bank than their British client can with a British bank.”
