Why a Weak Pound can be Good News for UK Businesses

22.11.18 12:26 PM By Paul Dunwell

By Paul L Dunwell writing for Kompass UK


Executive Summary:

After an examination of the pound’s weakness and how that might impact on imports, exports and more, we look at how Kompass can help its users to identify new suppliers, customers and partners both domestically and overseas in order to obtain tangible advantages from currency differentials.

Can We All Agree that the Pound is Weak?

Let’s keep this simple. And start with the realisation that, right now but for an assortment of reasons, the pound sterling (aka GBP) is weak. 

“How weak?” you might ask? Well in October 2016 the Wall Street Journal headline screamed 'Pound at Weakest Level in History against Currency Basket'. The article which followed recounted how our currency had already tumbled by 15% in just four months that had then passed since the UK voted for Brexit in June 2016.


That Wall Street Journal article was published 18 months ago. Yet the Bank of England website is currently showing a graphic analysis (see below; the titles are ours) which essentially shows there’s been no improvement during those 18 months. So, whilst there continue to be minute-by-minute movements by the pound against other individual currencies on FOREX (1) , in terms of the relative value of the pound against a basket of all significant currencies, we are currently at ‘the peak of the trough’ – the worst situation we’ve been in for decades.


To put our predicament in perspective, even taking the time-limit of the data we can see here from the Bank of England, nobody who is under 46 will have seen a weaker pound during their adult lifetime.

Historic effective exchange rates

So How Does the Pound Sit Beside Other Hard Currencies?

On one level this is a demeaning situation to be in. Because the British pound has traditionally been regarded as one of just a handful of ‘hard currencies’ which includes the US dollar, the Euro, the Swiss franc, the Japanese yen and, to a lesser extent, the Canadian and Australian dollars (see Wikipedia Hard Currency and below). In general terms, a weak currency is one that is not going to be particularly popular in portfolios, unless they’re owned by speculators, because there’s always that risk its value will decline further.


Having said that, as that table below shows, and it’s based on rates in mid-March 2017 and mid-November 2018, the pound has only made gains - rather than losses - against those other currencies amongst the big 7 over the last year. You can see that the biggest gain by the pound has been against the US$ since it’s had a bad time recently despite President Trump being in power, which has assumedly made it harder to export to the USA though British exports there in 2016 were for over £100 billion (i.e. double that of the next biggest export market). This suggests that trade will continue despite adverse exchange-rates where there is the political will and cultural ties. Indeed our ‘special relationship’ with the USA may well improve if a trade-war with China kicks off.

So, whilst there is no likelihood that the British economy is going to fall over in the coming months, and whilst the pound is still not a basket-case, those Bank of England comparisons since 1990 show this is surely an embarrassing position in which to find ourselves and ultimately it ranks alongside the humiliation of our credit-rating being cut from Aa1 to Aa2 last September.

 

Where is the Pound Now Likely to go Against the Euro?

I referred earlier to ‘the peak of the trough’. Perhaps to do so would be hasty. Because some experts speak convincingly of the potential for the British pound to now crash even further. Indeed in early March 2018 there was a credible warning that the pound sterling would be ‘forced to new historic lows again’ against the Euro. 


Having said this, every analysis comes with the ryder that all manner of events and sentiment can make currencies volatile. One consideration now, for instance, is that the ongoing political instability in Italy - because Berlusconi’s Forza Italia party is already tainted by his personal historic associations with corruption and debt crises - will undermine the Euro in relation to the pound and other currencies. One should remember that Italy is the 4th biggest contributor to the EU and accounts for 11.3% of its GDP, so its domestic uncertainty can impact on European trading-partners and the Euro.


See below, and take note of not only Italy’s significance but the UK’s too.The upshot of this is that the pound might be given a reprieve, though if you wanted a cheaper pound to spur more British exports then you’d not necessarily wish for that.

Share in EU GDP Total 2016 %

What if the Britain Voting for Brexit was Already Using the Euro?

Readers might, at this stage, ponder how things might be different if we were living in an alternative reality and one in which the Brexit decision had been made by a UK which was using the Euro rather than the pound (a bit like if Greece had quit the EU the other year when it was already using the Euro and not the old Drachma). Were that the case our own livings and holidays overseas, given the costs of withdrawal already being heaped upon us, the higher costs of imports and anti-UK/GBP sentiment, could surely not have suffered for the last 18 months as they have done – because devaluation of a British Euro would devalue all Euros!


It would be easy to assume that a weak pound is only of benefit to British exporters. But that, of course, cannot be the truth. And, anyway, it wouldn’t be the truth where the customers are resident in a country with a similarly weak currency. We’re not alone. 


In general terms, though, we can safely assume that a weak pound is helpful when - and this would be especially true where a rival supplier has a relatively strong domestic currency - it makes the British products and/or services cheaper, more competitive, and a more attractive proposition for the overseas consumer.

 

How Much Does This Matter if we’re Not so Reliant on Trade with the EU?

If we’re going to leave the EU it should matter less to us than it does now what the GBP - EUR rate is. Right now EU exports still account for more than 10% of the British economy but that 10% or so can obviously be divided between what goes to the EU and what goes elsewhere. Here 54% went to the EU in 2000 but it had fallen to 43% in 2016 - (see more data about our UK trade partners from the Office of National Statistics), therefore we are decreasingly reliant anyway on the EU, as now the balance has tipped so that the majority of exports are to other nations.


In fact the Office of National Statistics tells us that today the UK imports more from the EU than it exports there, but the countries where the reverse is true are Ireland (which is small by population but is more important to us than Spain or Italy), Switzerland, the UAE, Saudi Arabia, Australia and Brazil. Arguably such markets are, because they’re already well-travelled routes, going to be easier to penetrate for inexperienced exporters. It is worth mentioning here, and this reminds us of the interconnectedness of all things, that some countries such as the UAE have definitely been impacted by the awful year that the US dollar had in 2017. So its residents may well have shallower pockets and thus drive harder bargains if you want to sell to them - see The National for more on this repercussion. That same site suggests that the US dollar will now rebound, and the Japanese yen too, with the Indian rupee, Australian dollar and the South African rand picking up, but that the Chinese yuan and the Russian rouble might be a liability.


Yet, all of this apart, sites such as www.xe.com tell us that ‘currency rankings show that the most popular United Kingdom Pound exchange rate is the GBP to EUR rate’. So, although this may change, for the time being that focus is going to skew all perceptions of the value of the pound; we will tend to compare it to the Euro.

 

It’s Not All about Exports Is It?

The value of the pound is bound to impact on British exports, whether they’re of products or services. But it impacts on imports too. Think of raw materials, components and more that manufacturers, users and ultimate exporters here in the UK might need. And in this respect it might always be worth thinking about how the pound’s relative strength could give you purchasing leverage against anything sold in a currency weaker than the pound.


With this in mind you might ask yourself a number of questions, viz:

  • Is the weak pound going to make it easier for me to sell to overseas customers who arrive on my doorstep in the UK, however I price my products and/or services, and whatever currency they use to pay me?
  • Which currently-strong currencies are going to make anything sold in pounds attractive, especially for foreigners who want to holiday here, buy property here or make inward investments here?
  • Is it worth sourcing raw materials and/or components domestically, from within the UK, rather than buying them from abroad where the exchange-rates have made them relatively expensive?
  • Should I look at all potential suppliers overseas, for raw materials and/or components, and possibly even for labour, and focus on the difference that a relatively cheap or expensive currency might mean to the prices I pay?
  • When considering who my biggest overseas competitor suppliers might be, are currency shifts going to make them more or less attractive to shared distant customers to whom we’re both selling - and how might I address this understanding of my competitors’ circumstances as a risk or capitalise if there’s an opportunity?
  • If I’m being paid in hard or soft currencies other than the pound can I identify a comprehensive strategy for the cost-effective transfer, exchange, banking, holding, selling and using of those currencies to my best advantage? And does my cash-flow allow me the luxury of holding onto foreign currencies?


Only you can answer all of the above, but nowadays there is lots of data available to aid your understanding. And, when you’ve made sense of it enough to hit on a strategy, there are plenty of avenues for you to adapt to circumstances. Certainly Kompass are well-placed to help you do this, with global business data available across 70 countries and locally based support teams who are always ready to help!

 

Gresham’s Law

I couldn’t end without mentioning Gresham’s Law(2). Effectively it’s a monetary principle which states that, where there are two or more currencies in use, the bad currency will drive out the good currency. Ordinarily we don’t see this effect but, in the space of the last year or so, I have personally witnessed it happening in Bulgaria where the locals have recently displayed a preference for their own currency, the Lev, over the Euro. During that time the Lev has actually made small gains against the pound.


Has this phenomenon i.e. Gresham’s Law got any applications? Possibly. And it’s certainly worth bearing in mind! Bulgaria has been part of the EU for a decade but, self-evidently, it’s still not fully adopted the Euro. Any currency that continues to rise against the pound, however obscure, could certainly be worth holding if only to make local purchases. Most banks will let you open foreign currency accounts so that you can hold onto them and either pick the optimum time to exchange them or use them for purchases.

 

Colourful Confetti

Lastly I spoke of hard currencies. There are alternatives at the other end of the spectrum, of course. But these (and I’m providing 10 examples) come with a word of caution because with any of these super-soft currencies, as was the case during the Weimar Republic (Germany) which lasted from 1918 to 1933 (i.e. from Kaiser Bill’s fall to Adolf Hitler’s rise), their worth during the next 24 hours might well have fallen exponentially so at any point you may need a wheelbarrow full of lolly to buy a loaf of bread. Anyone who’s good at maths can check this, but by my reckoning the 10 banknotes below are worth, in total, £23 (3).  It goes without saying that, wherever the locals are likely to be paid with this colourful confetti, your pounds will be very attractive.


This table makes a few suggestions in respect of what you might purchase and export from them, though of course you could utilise their labour locally too.

Iranian Rials

FOREX code: IRR

Value mid November 2018: 1 Iranian Rial equals
0.000018 British pound.

Chief exports: petroleumchemical and petrochemical productsautomobilesfruit & nutscarpets.

Vietnamese Dongs

FOREX code: VND

Value mid November 2018: 1 Vietnamese Dong equals 0.000033 British pound.

Chief exports: crude oiltextiles and garments, footwearfisheries products, and electronics.

Indonesian Rupiahs

FOREX code: IDR

Value mid November 2018: 1 Indonesian Rupiah equals 0.000053 British pound.

Chief exports: oil and gascementfoodelectrical appliancesconstructionplywoodtextilesrubber.

Guinean Francs 

FOREX code: GNF

Value mid November 2018: 1 Guinean Franc equals 0.000085 British pound.

Chief exports: bauxitealuminagolddiamondscoffeefish, and agricultural products.
Laotian Kips

FOREX code: LAK

Value mid November 2018: 1 Laotian Kip equals 0.000091 British pound.

Chief exports: wood productsgarmentselectricitycoffeetincopper, and gold.
Uzbek Soms

FOREX code: LAK

Value mid November 2018: 1 Uzbek Som equals 0.000094 British pound.

Chief exports: energy productscottongoldmineral fertilizersferrous metalsnonferrous metals, food productsmachineryand cars.

Sierra Leonean Leones

FOREX code: SLL

Value mid November 2018: 1 Sierra Leonean Leone equals 0.000092 British pound.

Chief exports: diamondsrutilecocoacoffeeand fish. 
Paraguayan Guaranis

FOREX code: PYG

Value mid November 2018: 1 Paraguayan Guarani equals 0. 00013 British pound.

Chief exports: soya beansfeedcottonmeatedible oilselectricitywood, and leather.

Cambodian Riels 

FOREX code: KHR

Value mid November 2018: 1 Cambodian Riel equals 0. 00019 British pound.

Chief exports: clothingtimberrubberricefishtobacco, and footwear.

Myanmar Kyats 

FOREX code: MMK 

Value mid November 2018: 1 Myanmar Kyat equals 0. 00049 British pound.

Chief exports: natural gastimber, and wood productspulsesbeansfishriceclothingjade, and gems, (and unofficially narcotics).

Conclusions

Your ability to capitalise on exchange-rates will depend on who you know, who you deal with and where they’re located. Kompass can help you to identify suppliers, partners and potential customers in the UK, Europe and worldwide. They can also introduce you to other Kompass offices overseas where the staff will try to help you.


With business data available across 70 countries, tailor-made packages can be built for individual countries or standard regional data packages are available for Europe, Middle East & Africa, Asia Pacific, North & South America and worldwide - contact Kompass for more information.

 

References

1. FOREX - the foreign exchange market is a global decentralized or over-the-counter market for the trading of currencies. This market determines foreign exchange rates.

2. Named in 1860 by Henry Dunning Macleod after the English financier Sir Thomas Gresham who was a financier during the Tudor period. I fact the principle had been spotted as far back as the 5th century BC by the Greek playwright Aristophanes, by Nicolaus Copernicus the Prussian-born Renaissance mathematician and astronomer (‘Gresham’s Law’ is sometimes also known as ‘Copernicus Law’) and others.

3. The notes shown are worth the following: £1.85, £16.64, £0.53, £0.43, £0.91, £0.47, £0.18, £1.31, £0.19 and £0.49 respectively

 

 Author: Paul L Dunwell writing for Kompass UK 

Kompass UK Disclaimer