Calm before the euro storm – exporters watch out

Posted on 15 Mar 2013 by Tim Brown

David Huggett, currency consultant at Global Reach Partners, warns exporters that the currency markets are heading for a rocky road and the value of the euro is predicted to fall sharply.

“The media has been dominated with news about depreciation of the pound against major currencies for a few weeks. It’s a saga which has been fuelled by talk of UK’s triple dip recession and triple AA downgrade. And if you believe everything you read, it’s not going to change for a while.

For manufacturers who have to import some of their components, it is tricky business. For UK manufacturers who have been in the fortunate position of making everything on home ground and then exporting it’s been a great time to take advantage of favourable rates. Back in July last year euro sellers were biting their nails with the 1.2900 rate. Now they are 10% better off.

“Yet the tide could be turning. The focus is now turning back onto the euro debt situation. UK debt is among the world’s most stable. Although net debt has risen in recent years to be 66.6% of GDP, it remains way below levels seen during the last 300-years and much lower than EU maximum targets of 80%.

In recent weeks we have seen a turnaround in the performance of the single currency. In Italy the sentiment has been pretty docile. Now many in the market believe that the euro is close to 16% overvalued, in the last two days alone sterling has gained over two cents back against the euro.

This week the Jens Weidmann, President of the Deutsche Bundesbank, told a news conference following the release of the Bank’s annual report that: “The crisis is not over despite the recent calm on financial markets.” From a technical point of view it looks like we are seeing the bottom of a five year low, and the charts are pointing well back into Eu1.20s.

Exporters can no longer sit back and be complacent. They could be hit hard unless they protect against a currency shift. Now is the time to hedge at levels not seen in over a year and to protect budget rates. Those that are complacent run the risk of being 10% down on gross margin levels in six months time.”