The historically low exchange rate between of the euro against the dollar can be seen on Irish streets and country roads — American tourists are visiting in record numbers this year. But the low value of sterling against the euro is having the opposite effect in helping to keep away travellers from crossing the Irish Sea.
Major concerns were sparked following the Brexit referendum as to where exactly the euro exchange rate was heading against Ireland’s largest trading partner. Both industries and individuals are affected by foreign exchange rate movements. Importers, exporters, the tourism industry, and holidaymakers all notice when rates change significantly.
Holidaymakers may only be inconvenienced, while whole industries, and SMEs in particular, can be wiped out.
But it is not all about Brexit.
There are two components that make up the rate and determine its direction, specifically the path of the euro itself and that of sterling. Against the euro, on the eve of the Brexit sterling was trading at 76 pence. It is now trading close to 91 pence. While the UK currency has weakened, it is the euro that is emerging from its multi-year weakness.
Against the dollar, the euro has bounced from $1.05 to $1.18 this year on the perception that quantitative easing will end shortly and that eurozone interest rates will be on the rise. My own view is that the appreciation of the euro is greater than the ECB head Mario Draghi would have liked.
It has been ECB policy to keep the exchange rate low to boost an export driven recovery, and a rapid appreciation would not be helpful given Italy is barely off the recovery starting blocks.
Historically, the mean level of the euro was $1.35. If that were to happen in the next 12 to 18 months, it implies the euro would surge as high as parity against sterling.
In reality, the outlook is very uncertain and forecasts may be unhelpful. ECB decisions and Brexit bring huge influences. I think sterling will rise, but any gain could be years away. In the meantime, certain firms and households will experience positive or negative effects from these key exchange rates.
For companies involved in tourism, the scope is very limited. There are no practical strategies available to hedge against currency exposure.
The exchange rate currently favours US visitors but is very expensive for UK residents, while stable for tourists from the rest of the eurozone.
For firms importing from the UK, this is a golden time. Buying anything from the UK is very cheap and delivers windfall profits. For these companies, a hedging strategy is needed to lock in these benefits for years to come. Weak sterling, meanwhile, hits the car industry as cheap UK second-hand cars flood the market.
For exporters to the UK, it is a nightmare and they need a hedging strategy. The basic foundations of a strategy must aim to incur as many costs as possible in the currency of the country the firm is selling into, for example, taking transport costs in sterling.
Peter Brown is founder of Baggot Investment Partners