Brexit FAQs – Currency Markets

If you are trading in the UK, we are here to support you. Our questions and answers about Brexit can help you manage your currency needs in anticipation of Britain’s exit from the EU.


Last updated: 12 July 2016

  • --------------------Start of Accordion---------------------------

    What has been the Brexit market reaction?

    The fallout since the Brexit referendum has been felt in the media, in equity markets and particularly in currency markets where sterling has come under pressure.
     

    The UK currency appreciated almost 20% between 2013 and 2015. Although the UK referendum date was fixed in 2015, it was only this year that the market started to become nervous about this event, as reflected in a weaker sterling since the start of the year. 
     

    However, when the result of the referendum became clear, sterling weakened dramatically, hitting a 31-year low against the US dollar and experiencing its biggest ever one-day fall on Friday, 24 June.
     

    Although it has since stabilised, it’s now about 14-16% weaker against the euro and US dollar when compared to the start of the year.

    --------------------End of Accordion---------------------------

  • --------------------Start of Accordion---------------------------

    What are the exchange rate forecasts for the remainder of 2016?

    Sterling could lose further ground in the coming weeks against a backdrop of heightened economic and political uncertainty. There is also the prospect of monetary easing from the Bank of England over the summer, which could provide further downward pressure of the currency.

     

    We could see the euro rise towards 88p by year end, while sterling may go as low as $1.25 or below against the dollar. The euro is also likely to lose further ground against the dollar, as the UK’s departure will be seen as a severe blow to the EU. The EUR/USD rate could fall back down towards the $1.08 level later in the year, especially if the US Federal Reserve increases interest rates.

     

    These are the average foreign exchange rates for euro as at 30 June, for typical trading ranges:
     

      Average 1 year Average 5 year Average 10 year
    EUR/GBP: 0.7496 0.8032 0.8082
    EUR/USD: 1.1100 1.2601 1.3195

    --------------------End of Accordion---------------------------

  • --------------------Start of Accordion---------------------------

    What does this mean for my business now?

    If your business exports to the UK and gets paid in sterling, the movement in the sterling exchange rate has already affected your sales margin, if you were un-hedged. The outlook suggests that this negative effect may increase further in the coming months. 
     

    This is an immediate short-term issue that you need to think about. In the next answer we give you some steps you can take. 
     

    Customers in the hospitality sector need to be aware that the cost of holidays in Ireland for UK customers will increase. This may, in the medium term, lead to customers deciding to holiday in destinations that offer better value. 

    --------------------End of Accordion---------------------------

  • --------------------Start of Accordion---------------------------

    What steps can i take to reduce my exposure to exchange rate volatility?

    1. Protect your business margins by eliminating exchange rate risk as it arises with spot FX or Forward Foreign Exchange (FX) Contracts, or both. 

     

    A simple approach is what we call an “FX Hedging Policy”. You can choose to put Forward FX Contracts in place with AIB to cover the currency payments and receipts you expect in the near-term. You can treat payments and receipts further into the future with less coverage, to give you some flexibility about what FX rate would apply. 

     

    A sample FX Hedging Policy looks like this over 12 months:

     

    Rolling Hedging

    Programme

    Next

    Quarter

    Quarter 2 Quarter 3 Quarter 4
    % Covered: 100% 75% 50% 25%

     

     

    2. Or, you can choose to remain unhedged and take advantage of potentially favourable exchange rate movements. This choice mainly means using spot FX (prevailing rate on the payment date).  

     

    We have solutions you can consider when you want to hedge your foreign exchange exposure. Talk to your Relationship Manager who can help guide you through the decision-making process. 
     

    If your business makes and receives payments in sterling, you can also hedge your FX position by opening a sterling account with us. This will help you to reduce your FX exposure by offsetting sterling receipts and payments.

    --------------------End of Accordion---------------------------

  • --------------------Start of Accordion---------------------------

    Where do i get more information?

    Talk to your Relationship Manager to discuss these solutions, or visit our Foreign Exchange Products page for further information. 

    --------------------End of Accordion---------------------------


See also:

• Forward Contract

• Currency Current Accounts

• For further information on this topic, please visit our Brexit Centre