International Business Kicking Back in Gear But Uncertainty Still Looms
The global COVID-19 pandemic has been tough on pretty much everybody. The total mortality rate is now estimated at 5 million and billions of people have endured long lockdowns. Furthermore, several world governments have even had to seek assistance from the IMF because of the economic toll of the pandemic and wayward international currency exchange rates.
But one sector that has particularly suffered, is international business. Whether it be travel and tourism, import & export or currency trading, any business specializing in the movement of people, goods or services between borders was more or less brought to a standstill for much of 2020 and 2021. Perhaps worst of all, many companies found themselves ineligible for any form of domestic governmental assistance.
International travel bans and border closures left many businesses completely unable to operate and the loss of consumer confidence in the market deeply impacted others as households cut spending and ‘battened down the hatches preparing for the worst. Whilst the vaccine rollout during the summer of 2021 looked tentatively encouraging, the rise of the Delta Variant is now signaling that more lockdowns and closures may be in the pipeline for the winter.
The Death of the Dollar?
Not even the usually robust US Dollar has been spared the scourge of COVID and the currency started the year with a DXY under 90 for the first time since the financial crisis of 2010. Extensive quantitative easing to fund federal assistance programs even had some commentators prophesying the “death of the dollar” as it was printed at record rates. Of course, such pronouncements may well prove to be nothing more than premature naysaying. As of September 2021, the dollar remains the primary global currency and is well and truly bouncing back with a DXY approaching 92.
COVID-19 vs The Foreign Exchange Rate
When the world initially “locked down” in April 2020, the global markets and particularly foreign exchange rates showed some real volatility as the below illustrations nicely demonstrate.
Avr Exchange Rates at Jan 2020
1 USD = 0.768 GBP
1 USD = 0.90 EUR
1 USD = 6.9 CNY
Avr Exchange Rates at Apr 2020
1 USD = 0.86 GBP
1 USD = 0.92 EUR
1 USD = 7.06 CNY
Avr Exchange Rates at Sep 2021
1 USD = 0.72 GBP
1 USD = 0.85 EUR
1 USD = 6.46 CNY
As you can see, the Dollar Euro rate was less impacted than expected at the height of the pandemic but has seen a more recent decline.
It is also worth bearing in mind that the Dollar Sterling rate has also being slightly impacted by the Brexit effect – the United Kingdom finally left the EU common market on 1st January 2020.
Import and Export – Winners and Losers
The volatility in the markets of 2020 particularly impacted import and export trade. In some cases, the B2B price of goods varied as much as 20% as exchange rates wildly fluctuated. There were of course, both winners and losers from this dynamic but even businesses that benefited are understandably now wary of any further turbulence.
With the possibility of more interruption to trade ahead and more volatility in global currency markets, businesses are now paying more attention than ever to their currency holdings as well as to exchange rates and fees. Whilst in happier times, many businesses may have been quite comfortable paying banking fees on every international transaction, many are now looking for better deals as a way to cut costs.
International currency exchanges will always be subject to interbank exchange rates. However, it is less widely known that most banks also apply their own “handling fees” which can sometimes be as high as 5% on each transaction!
The good news for business is that the Fin-Tech sector is now rivaling the banks and there are now a number of cost-effective international money transfer options out there. Generally, the challenger start-ups offer much lower fees than the banks and can also help you to find the best exchange rate for bank to bank transfers.
Any business or even individual who regularly makes international payments or bank transfers would be very wise to start paying extra close attention to transfer fees. By signing up to a dedicated service provider, a business or individual can be kept up to date with the best exchange rates on the market. Whether you are looking for the latest USDEUR rate or the best JPYUSD rate, it is worth taking the time to sign up.
Forward Contracts – Locking in the Best Foreign Exchange Rates
Another notable global trend is that many businesses are now defending themselves against any further volatility in the markets by opting for Forwarding Contracts for USD. Forward Contracts work by a business (or individual) agreeing to buy a certain amount of currency at a fixed, “locked in” rate protecting them if the USD rises. Typically the business is required to make 10% of the exchange upfront and the rest within a 12 month period. This in itself can be something of a gamble and some businesses can lose out if, for example, the USD drops against their native currency. However, what it does offer is a certainty which is something that is otherwise in short supply right now.
There are a number of brokers offering Forward Contracts so as with bank exchanges, it is worth shopping around and comparing rates and deals.
What Lies Ahead?
As autumn looms and the nights begin to draw in, the global prognosis is looking less encouraging than many would have hoped. The initial feel good “vaccine bounce” of summer 2021 saw travel bans lifted and a surge in global trade. Sadly, the onset of flu season mixed with the creeping Delta Variant means that the final quarter of 2021 may be a tough one for businesses and their customers alike.
Therefore the dollar is rightly back in focus. Businesses are now placing their bets searching for the best possible bang for buck from any changes in the foreign exchange rate.