Coronavirus has spread alarmingly quickly across the world in just a matter of months, dramatically changing the way we all live and work.
Currency markets have been particularly affected by the outbreak, with significant volatility seen in all major currencies. The pound, for example, dropped to thirty-five year lows against the US dollar in March, while the Aussie dollar and other commodity currencies have had a tough time due to close economic ties with China.
As some markets begin to ease lockdown measures, certain currencies are starting to lurch back upwards. Things are changing rapidly, and just the slightest change in sentiment is having dramatic effects on the value of currency.
Why currency matters
Currency might not be something you think about every day, but its impact on your business can be profound.
The most obvious effect is for startups trading across borders. Whether that means an international payroll, global supply chain, or overseas customers, currency swings can be a real problem for you if they’re not properly managed.
That’s because your business relies on a constant international flow of cash, and with every cross-border transfer comes the risk of an unfavorable exchange rate eating into your margins.
Given all the other uncertainties we face today, that’s just not a problem you want to have.
Luckily, there are ways startups can protect themselves and find at least some financial certainty in these difficult times.
1. Pay attention to exchange rates
Running a startup means your attention is always being pulled in a thousand directions. In recent weeks, the news has been moving so quickly that keeping an eye on the market response is just one more demand on your time. It’s important to watch exchange rates, but it needn’t be you that does it.
A good currency partner will help you to keep your focus on the bigger picture, and can even help you set up a limit order to ensure your money is automatically transferred when the market reaches a target exchange rate.
I’ve recently seen a notable increase in startups booking pound to dollar limit orders in an effort to capitalize immediately on any currency swings in their favor.
2. Lock in some currency certainty
A currency plan is one of the best ways to take control of costs and limit your exposure to currency shocks. Even if you’ve already felt the impact of exchange rates since the outbreak, it’s not too late to protect your business against future volatility.
A forward contract, for example, lets you lock in today’s exchange rate for a fixed period, so you can more easily plan your international costs.
Forward contracts are more valuable now than ever, and I’ve seen many businesses coming to us to ask about this approach since the beginning of the pandemic. Hedging a portion of your overseas earnings in this way will reduce your vulnerability to exchange rates, protecting your business from any unexpected changes in the market.
3. Get on top of your global payments
In some cases, you might be unnecessarily moving money back and forward across borders when a more rationalized approach would reduce your exposure to exchange rates.
Besides simplifying your supply chain, you could look into the option of a global currency account which lets you hold multiple currencies in one place. To take an example, that means you could pay your Hong Kong dollar-denominated payroll directly from Hong Kong-dollar revenues, without having to transfer in and out of your home currency.
This saves you the need to transfer money once, only to have to transfer it back again. Put simply, the fewer international transfers you make, the less exposed your business will be to volatile exchange rates.
Although there is still a lot that we can’t foresee right now, getting a hold of currency exposure is one way to help shield your startup from external pressures, so you’re in a stronger position to bounce back at the other side of the crisis.