Moneycorp: Two more hikes from the BoE?

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Chamber FX partners, Moneycorp take a look at how currencies from around the globe are currently performing.

GBP

As expected, the Bank of England (BoE) delivered a twelfth successive rate hike last week (Thursday 11), raising UK interest rates by another 25bps to 4.5%. At 7-2, the voting pattern was also the same as last time round, with Swati Dhingra and Silvana Tenreyro once again voting fora pause.

The BoE also significantly revised their short term UK inflation outlook higher, admitting that they had underestimated the strength and stickiness (sorry) of food price rises. The BoE now think that UK inflation will not reach their 2% target until early 2025. They had previously expected inflation to subside to that level within a year.

On a positive note, the BoE now think that the UK economy will avoid a recession, with GDP expected to reach 0.25% throughout this year, and then surging by 0.75% during 2024. Gone are the days when Andrew Bailey was predicting a long drawn out recession in the UK, and whilst growth may not be anything to write home about, growth at any level is something to cheer about.

Given that headline inflation remains in double digits, markets still expect the BoE to be forced into further rate hikes, with those changing rate dynamics one of the key drivers sparking the recent rally to a one-year high in GBP/USD. The expected terminal rate is now at 5%, which would imply another 2 further hikes from the BoE. While the pound may have witnessed some profit taking after the BoE, those implied rate hikes could help to keep the pound elevated in the longer run.

In the meantime, GBP/USD dropped from over 1.2600, to just under 1.2500 yesterday afternoon, a move which was aided by broader market risk aversion and profit taking/position squaring after the event. Looking ahead, this week should confirm another solid UK employment report, with ILO unemployment predicted to remain at (or near) 3.8%.

EUR

With the ECB having raised Euro area rates by another 25bps last week and signalling further hikes to come, one may have assumed that the Euro would continue rising, but the single currency has since struggled to maintain its impressive recent rally, with EUR/USD slipping from a high of just under 1.1100, to around 1.0900 by last Thursday.

Markets seem unconvinced that the ECB will persist with rate hikes for much longer than the Fed, which may be impacting the short-term profile for the single currency. Recent commentary from ECB officials has also left more questions than answers, with a more cautious view on future rate hikes from the ECB’S Nagel, even if the likes of Lagarde and Kazaks have maintained their own hawkish outlooks.

On the data front, the latest release of German inflation saw Harmonised inflation remaining at 7.6% on an annual basis. Regional inflation is expected to remain close to the 5.6% region when released this week. The latest growth data is released this week too, with provisional regional growth predicted to have risen by 0.1% during the first quarter of this year and 1.3% on an annual basis.

Back to the Euro and overall market risk sentiment will play a big part in dictating the short-term profile for the single currency. If markets remain twitchy, then this will likely feed through to a weaker Euro and vice-versa.

USD

The latest US inflation report came out just below estimates, with headline inflation slipping under 5% for the first time in two years, dipping to 4.9% on an annual basis during April, and core inflation also dropping to 5.5% over the same period. Markets had been expecting the headline rate to remain above 5%. The news may just give the Fed enough wriggle room to pause rate hikes at their meeting next month. On that note, market-implied expectations for a 25bps hike dropped from over 20% to around 5% in the immediate aftermath, suggesting that markets have convinced themselves of a probable pause. Lower airline prices helped to soften headline inflation.

The subsequent rally in risk assets was somewhat short lived on the day. This is perhaps due to several reasons. On inflation itself, whilst it is pleasing to see further declines, inflation still remains 3% above the Fed’s 2% target level, so the Fed are unlikely to be cutting US rates anytime soon, even if markets disagree and have been pricing in several rate cuts before the end of this year.

There are also several other big issues worrying markets just now. The US debt ceiling negotiations are once again looking like they will go to the wire. Janet Yellen has been pushing for a conclusion, given that she has the brains to work out just how catastrophic it would be if the US defaulted. Talks are ongoing, but the closer we get to the beginning of June, the twitchier markets will get. Donald Trump has advised the Republicans to allow a default. That kind of talk will do little to settle markets in any way. If that were not enough, in spite of talk that all is well, the pressure on regional Banks still persists, with shares in Pacific West coming under intense selling pressure over the past week, as they deal with large deposit outflows.

As for the dollar, well the dollar index (DXY) has remained fairly rangebound over the past week, buoyed at times by broad risk aversion. However, with the Fed pause the most likely scenario, those changing rate dynamics could limit any upside potential for the greenback. Looking ahead, the latest Retail Sales are likely to dominate market attention.

CAD

Last week’s Canadian employment report saw another month of strong gains as the labor remarket remains impressively robust. The economy added another 41.4K new posts during April, above the March gain of 34.7K, and beating estimates of a 20K increase. Overall unemployment also remained at 5%, beating estimates of 5.1%. That news helped to lift the Loonie to a 5-week high, with USD/CAD dropping to as low as 1.3300 at one point on Friday, having been as high as 1.3630 just last Thursday. The news will give the BoC some slight cause for concern as they battle a broadly weakening economy, against a red-hot Labor market.

This week should give the BoC more insight into the current state of the Canadian economy, with the latest inflation and Retail Sales data due for release. On the inflation front, the BoC may get some good news, with yearly core inflation expected to moderate further from 4.3 to 3.7% during April. Headline inflation could fall even further, given recent weaker energy prices. That would go some way to justifying the BoC’s decision to remain on pause, even if the labor market remains red-hot.

Back to the Loonie, and after the big jump from 1.3600 to 1.3300 last week, this week has been one of consolidation, culminating in USD/CAD rallying back to 1.3500, with oil prices and broad risk aversion the big drivers behind the reversal.

AUD/NZD

Recent economic data from Australia has questioned the RBA’s recent decision to resume rate hikes, after their previous short pause. Retail Sales over the first quarter declined by 0.6%, having been expected to have declined by around 0.4% over the period. However, consumer inflation expectations remain robust, rising from 4.65 to 5% in the latest survey. Next week sees the release of the minutes from that surprise RBA meeting, which should give markets a better insight as to the RBA’s next move. The latest Australian employment report is also due, which could see overall unemployment decline to a very respectable 3.3%.

For a while last week, AUD/USD surged to a near three-month high, pushing back over 0.6800. However, that broad market risk aversion helped to reverse the gains, with the pair moving back below 0.6700 by last Thursday. NZD/USD broadly followed, moving as high as 0.6385 – a one month high, before slipping back below 0.6300.

If your business has any international payment requirements, MoneyCorp can carry out a free foreign exchange analysis which will provide you with an in-depth report and suggestions around where your business can save money. Please contact your engagement manager for more information.

Spring Budget update – our key takeaways

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Blogpost from Chamber FX partner, Moneycorp

The Chancellor opened his budget announcement with positive news from the Office of Budget Responsibility, which has forecast the UK will now avoid a recession in 2023 and inflation will slow to 2.9% by the end of 2023, down from 10.7% in the fourth quarter of 2022.

How has Sterling responded?

  • GBP/USD is lower (at 1.2020*), but that is a factor of broader market risk aversion
  • GBP/EUR is up nearly 1% on the session

This is reflective of the pound broadly faring much better and is perhaps a bigger sign of a positive market reaction to Budget.

The ongoing fallout from the SVB crisis has now morphed into vulnerable bank stocks, such as Credit-Suisse. We often see this in times of uncertainty when investors flock to the relative safety of the US government treasuries. Read more here.

Key outcomes from the budget:

  • Free childcare of 30 hours per week for working parents is being expanded to cover one and two-year-olds. This will extend to all children from 9-months old in September 2024.
  • There will be a major shake-up to benefits for people with disabilities. The Work Capability Assessment will be scrapped in favour of a new assessment that will encourage more disabled people to try work without fear of losing their benefits.

Energy Prices

  • The government’s help with energy bills is being extended for a further three months
  • £200m has been earmarked to help brings bills in-line with direct debit payers for customers using pre-payment meters
  • There will be £63m to help leisure centres cope with rising energy bills

Pensions

  • The lifetime allowance on tax-free pension contributions, which currently stands at £1.07m, has been scrapped
  • The annual tax-free allowance has also increased from £40,000 to £60,000.

Tax

  • Fuel duty has been frozen for another year
  • Corporation tax is being increased (as planned) from 19% – 25%
  • Alcohol tax on draught products in pubs is to be up to 11p less in the pound compared to shops and supermarkets

Environment

  • Hunt has made a £20bn commitment over 20 years on low-carbon energy projects, with a focus on carbon storage and capture
  • Nuclear power is to be re-classed as ‘environmentally sustainable’ to drive investment in the energy sector.

Defence

  • Defence spending is being boosted by £11bn over the next five years

*Indicative rate as of 15/03/23 at 16:42

This does not constitute financial advice.

How Foreign Exchange Can Save you Money

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Five ways looking at your foreign exchange provision can help you cut costs in 2023

The outlook for 2023 is bleak. Soundbites from experts worldwide are touting global recession, downturns in growth, increasing inflation, and housing market crashes. The UK, particularly, is set to suffer this year with the war in Ukraine still impacting the cost of living and rising interest rates reducing demand for property while forcing up rental rates and creating a perfect storm to undermine the UK housing market.

Needless to say, times will be tough for UK businesses as the purse strings of the average household tighten, and the effects of slow growth and continued inflation begin to have more of an effect on the day-to-day. 2023 should be about saving, but making savings in the right places, being shrewd about utilising the services that are available to you, and leveraging them to offset increasing costs.

Something often overlooked is saving money through your foreign exchange provision. This can be a smart way to save money quickly without cutting back on other areas of your business.

Here are our top five ways to save money by optimising your foreign exchange provision:

  1. Make sure you’re getting the most competitive rates

When you’re exchanging large amounts of money; a small difference in rate can make a big impact.  We source our rates through our panel of 18 liquidity providers and but many banks are bound by a single rate.

Make sure you’ve managed your execution risk because depending on how much you’re exchanging, the difference could be in the thousands – multiply that over the year, and your savings become significant.

  • Avoid unnecessary fees

Watch out for hidden costs – some foreign exchange providers charge you to open a corporate account and to hold various currencies, while others charge fixed fees on transfers.  Compare the fee structure against your foreign exchange needs, as different providers will work better for your business. 

  • Open a multiple-currency account

If you receive multiple currencies, make sure you have an account that supports that. It’s easy to incur charges and fees inadvertently when you receive different currencies into your UK bank account – and once it’s done, it’s difficult to do anything about it.

With an account that holds multiple currencies, you avoid these fees. It’s an easy move to cut costs and we’ve seen clients save over $10,000 simply by opening a multi-currency account.

  • Protect yourself against risk

In 2022 the GBP/EUR rate fluctuated between 1.21 and 1.07 during the year; this represents a difference of more than 12%.  The impact of these fluctuations are present all the time in business, for example when you raise invoices in foreign currencies.

In an ideal world, they would all be paid within thirty days but sometimes it can stretch over months. If there’s been a big swing in the exchange rates during that time it’s bound to have meaningful effect on the trade – whether it eats into your profit margin, or swallows it up completely.

To mitigate this kind of risk, your organisation can explore Forward Contracts. This allows you to hedge the rates on invoices for future payments, protecting you against volatility.

  • Get some expert guidance

FX experts work with you to understand your exposure and suggest the most appropriate currency tools that will enable you to save money on your exchange transactions. An experienced currency management professional can execute your risk management strategy in line with your risk appetite and investment objectives.

We know it’s not always easy to see the true cost of foreign exchange, so at Moneycorp, we start every client relationship with a free audit.

By looking at up to 12 months of data, including the times and dates of your transactions, the exchange rates, and the type of products your business uses, and what currencies you trade, we help paint a clear picture.  This allows us to understand your foreign exchange history and the needs of your business to show you accurately how and where we can save you money.

Moneycorp can then help you protect your business from unwanted exchange rate movements with various strategies to suit your risk appetite and business plans.

Written by Sophia Awan, strategic partnerships manager, Moneycorp.

For more information or to arrange a free FX audit, please contact your engagement manager.

Photo by Omid Armin on Unsplash

Moneycorp round up following Autumn Budget

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The much-anticipated Autumn budget statement, announced by UK chancellor Jeremy Hunt on 17th November, delivered a substantial package of tax rises combined with spending cuts, that at £55bn, seek to reverse the shambolic ‘mini’ budget tax cuts and unfunded spending plans, orchestrated by his predecessor Kwasi Kwarteng just eight weeks ago. The package has also been designed with the aim to tax those who can afford it more, with an increased tax on energy companies, with their windfall taxes on profits rising from 25 to 35%, and the point at which higher income earners get taxed has been lowered from £150k to £125,140.

Thoughts from the dealing desk

“The most important informational release on 17th November was the Autumn Statement from the ‘new’ Tory Leadership. Jeremy Hunt, Chancellor of the Exchequer and fellow Old Carthusian announced a slew of tax rises and spending cuts worth billions, in an attempt to tackle the soaring inflation issue and to try and restore the UK’s credibility with international markets, in what can be considered a highly austere autumn budget. The Office for Budget Responsibility judges UK to be in recession, the OBR predicts growth for this year overall of 4.2%, but size of the economy will shrink by 1.4% in 2023. Growth of 1.3% predicted for 2024, 2.6% for 2025, and 2.7% for 2026, UK’s inflation rate predicted to be 9.1% this year and 7.4% next year. Unemployment expected to rise from 3.6% to 4.9% in 2024. GBP/USD took a turn lower yesterday morning following what has been a very positive week for the Pound, since the release of softer US inflation data last week. The Pound had gained over 5% against the Dollar over the past week, breaking into the 1.200’s on a thin wick. The austere autumn budget sent the pound lower against the USD by over 1% as tax increases and spending cuts were absorbed by the wider market. Many clients had feared the budget may send the Pound lower and looked at covering USD exposure prior to the budget. With the pound falling during the morning on 17th, last minute hedges were put in place to protect against the anticipated downside movement on GBP/USD & to take advantage of the recent rally for cable. Clients whom acted early on 17th managed to mitigate most of the losses for GBP ahead of the budget. ”

-Oliver Taylor, FX Dealer

EUR

Mixed signals

Having bounced from around 0.9750 to just under 1.0400 from the beginning of November to the end of week commencing 7th November, the following week has been fairly flat for EUR/USD, with the single currency maintaining those gains, without pressing forward. Mixed messages have played their part, with rumours of a split amongst the ECB as to whether they should continue raising Euro area rates at 75bps going forward, or adopt a smaller pace of hikes. Economic data has also played its part, on the one hand, slightly softer regional headline (Harmonized) yearly inflation of 10.6%, versus an expectation of 10.7% could be considered a positive, however, weaker regional employment gains, soft growth, and tepid manufacturing data, also suggest that the economic slowdown is accelerating.

USD

Softening inflation

After week commencing’s 7th November strong rally in risk assets driven by the weaker US CPI report, the rally was further cemented in the early part of the following week, after the latest US PPI report also highlighted the emergence of potentially softening prices. The PPI index for final demand rose 0.2% (MoM/Oct), and way below estimates of around 0.5%, helping to ensure that the yearly headline reading dipped to 8%, from 8.4% previously. Core PPI dropped from 7.1 to 6.7% (YoY). Markers rejoiced (again).

Not a great time to be a dollar bull

The dollar decline that began after the dollar index (DXY) peaked at 114.70 in the last week of September, continued until the middle of week commencing 14th November, reaching a low of 104.90. Looking ahead, it is probably also reasonable to suggest that, unless there is a material event for markets to go into a nosedive, the high for the dollar this cycle has probably been reached. Amongst the major currency pairs, USD/JPY has now moved from around 152.00, to under 140.00 in that time, and most of that move happening well after the BoJ last intervened. Impressive indeed.  The week commencing 21st November is all about the US Housing market, with further declines highly likely given those rate hikes, and evidence of previous declines.

Through our partnership with exchange experts MoneyCorp, we’re looking to help promote transparency in the FX market and decrease the cost of foreign exchange for businesses. If your business has any international payment requirements, MoneyCorp can carry out a free foreign exchange analysis which will provide you with an in-depth report and suggestions around where your business can save money. Please contact [email protected] for more information.

Hedging: meaning in business

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Blog post from Chamber FX partner, MoneyCorp

The term ‘hedging’ is used frequently in foreign exchange, investing, and business.

Hedging meaning in business refers to a practice that may offer protection against the risk of potential losses of your finances.

The practice is similar to taking insurance to protect yourself from one or another loss, such as protecting your vehicle from accidents or theft. Find out more about the practice and strategies of hedging against currency risk below.

What is hedging in business?

The simple answer to the question, “What is hedging in business?” is that it is an insurance-like practice. If you decide to hedge, you are essentially trying to insure yourself against the impact of a negative event on your foreign currency or currencies. While hedging cannot prevent negative events from happening, proper hedging can reduce the impact of those events.

To pick up on the car insurance example mentioned above, insurance will not prevent accidents or theft from happening. However, if your vehicle is stolen, the insurance pay-out can lessen the impact of the theft on your finances, as you will not need to pay in full for a new car out-of-pocket.

Some strategies of hedging against currency risk may reduce your exposure to different types of risks. However, those strategies are not as simple as paying a monthly or annual insurance premium. When it comes to forex, hedging meaning in business refers to using market strategies or financial instruments in a strategic way to offset the risk of adverse price movements. Basically, this means hedging one currency pair by making a trade in another.

How does hedging work?

Hedging meaning in business may become clearer when you see how it works with regard to foreign exchange. Take a British company that makes knitwear for example. Local sales see the company earn in Pounds. However, if they sign a contract for bulk sales of knitwear to a US company, fluctuations in the GBP-USD exchange rate means the company is open to losses or gains before exchanging their Dollars for Pounds.

Without hedging, the company will have no idea what the exchange rate will be when it exchanges the Dollars for Pounds. The challenge then is to find the best way to protect the company from exchange rate-related risks. There are several strategies of hedging against currency risk, such as currency contracts, orders, and options. By choosing a forward contract, the company can fix the price in advance. Options offer move movement in the hope of improvements in the exchange rate while limiting worst-case scenarios.

Strategies of hedging against currency risk

Taking a closer look at strategies of hedging against currency risk offered by moneycorp, you will find products such as forward contracts, FX orders, vanilla options, and zero-cost options.

  • Forward Contract: With a forward contract, you can buy currency on an agreed date in the future at a pre-fixed rate. You can lock in a rate for up to two years. You may need to make a deposit when taking a forward contract.
  • FX Orders: A FX order may help you secure a better deal if you need a particular exchange rate but do not need to purchase currency straight away.
  • Vanilla Options: Vanilla options are the most basic of options. With one of these options, you have the right rather than the obligation to exchange currency at a particular rate on a specified future date.
  • Zero-Cost Options: Zero-cost options do not require an up-front premium. They do not have all of the benefits of options such as vanilla options although they still can offer protection against adverse exchange rate fluctuations.

To find out more about Moneycorp’s services including strategies of hedging against currency risk, or as a member of the chamber you can arrange a free currency audit by contacting [email protected]