Low pound culprit for export drop

Times are good for Dutch export companies — as long as they are not in business with customers in the UK. The fall of the British pound has put significant pressure on the export value to that country, according to Joost Derks of the Dutch Payment and Exchange Company.

The Dutch export sector is doing well. According to the CBS, the value of exported goods in December 2016 was 6.1 per cent higher than in the same period a year earlier. That is an increase compared to the 5.5 per cent of November. Figures from various professional organisations point out that the growth will clearly continue in 2017. The export of flowers, plants and bulbs increased by at least 12 per cent in January, according to data collector Floridata, and that increase means it has surpassed €400 million for the first time ever. There were more exports to nearly every country, the UK being the exception. The export of ornamental plant cultivation to that country decreased by six per cent to less than €50 million.

The same pattern can be discerned in other industry sectors. The culprit is the British pound, which is currently ten per cent lower than it was 12 months ago. In the past six months, that difference was often even larger. The pound has been under pressure ever since the Britain voted to leave the EU in the Brexit referendum last year. That is an unpleasant development for Dutch export companies, which are left with much less after the exchange into euros, than was initially predicted. For these parties, it is important to map what they can soon expect from the British currency.

The policy of the central bank often has much influence on the exchange rate. At the start of February, the Bank of England increased its prediction for the economic growth in the coming year from 1.4 per cent to 2.0 per cent. The bank warned that interest rates could start increasing faster than predicted by traders if wage rises accelerate. A higher interest rate makes it more attractive for financial parties to keep their money in pounds. However, the chances are that the impact of economic developments on the British currency will soon be overshadowed by the news surrounding the negotiations with the EU as part of Brexit, which will be officially started by Theresa May on 9 March.

A chain that does business in the UK can handle the exchange rate fluctuations of the pound in various ways. The first possibility is to do nothing and await the developments. In that case, there is the risk that returns will disappoint if the currency drops again. Entrepreneurs who wish to exclude this risk, can choose to get a forward contract or currency option from a currency trader. A forward contract is a good option for companies that receive a payment in pounds at a certain time. That income is then exchanged into euros at a predetermined rate, so that price fluctuations in the meantime have no influence on the returns.

A currency option is a decent choice for an entrepreneur who issues a tender in a strange currency. He is then given the right to exchange pounds into euros at a fixed rate at a predetermined date. One benefit of a currency option is that exchanging is a right: at the predetermined date, the entrepreneur can personally choose whether he will use the price agreed upon or that he will exchange at a possibly more favourable rate.