Changes in foreign exchange (FX) rates can hike costs, erode profit margins and even affect customs declarations, so it’s crucial for traders be aware of them and manage the risks.
That was the message of a Chartered Institute of Export & International Trade public webinar held last week (17 July). You can watch the full session back here.
Taking audience questions and delivering insights on currency and international trade were James Tinsley of Currency Solutions, as well as the Chartered Institute’s senior advisor on international trade legislation, Garima Srivastava.
The depreciation question
One audience member queried the panelists on the consequences of a sudden depreciation in overseas currency.
“You have to start by reviewing your cost structures,” Srivastava explained.
“Your imported raw materials or costs could go up, impacting profitability.”
For exporters to a market where currency has depreciated, it could require a rethink on pricing in that market.
“For example, if you’re exporting to Europe and the euro weakens against your home currency, adjusting your euro-denominated price could help you maintain market competitiveness,” she suggested.
Tinsley said that, when negotiating a contract, “you don’t want to put yourself in a place where you have no movement” on terms, should depreciation mean that costs or prices change. Flexibility can help to smooth out losses as a result of currency depreciation.
Documentation and exchange rates
Queried on justifying currency-related changes in price at customs, Srivastava said that “typically, exporters are required to accurately reflect the value of goods on customs documentation”.
“They also have to adequately document the exchange applicable at the time of export. Any significant discrepancies due to currency fluctuation should also be clearly documented so you are able to justify to customs authorities how the currency has fluctuated.
“This will ensure compliance with valuation regulations. It’s not your job to control fluctuations, but it is your job to record them.”
She cited an example in which she had worked of a Canadian seafood exporter sending a shipment of lobster to Hong Kong.
At the time of invoicing, currency volatility meant that the exchange rate between the Canadian dollar and Hong Kong dollar had changed by the time the shipment arrived.
“The exporter there was only required to provide documentation showing the exchange rate used at the time of invoicing, or provide a valid reason for any difference. They were able to show this difference and justify their values.”
The political outlook
Tinsley stressed throughout the webinar that it was important to remain keenly aware of how geopolitical developments could hit exchange rates.
Speaking before US president Joe Biden announced he was ending his re-election bid, Tinsley suggested that Biden was “pro-Europe” and likely “pro-the euro” currency.
A Trump win, Tinsley said, could be strong for the US dollar. The euro could also “weaken” if Trump implements new tariffs on goods entering the US from Europe – something he appears poised to do should he win the election.
“In terms of the sterling-euro exchange rate, it should remain pretty much the same with regards to what’s happening with the [US] dollar,” Tinsley said.
A more general “rise in global tensions” would mean we “could also expect to see a strong US dollar,” he explained.
Even beyond the known tensions around the US-China relationship and potential second Trump presidency, he added, “anything could happen, however unlikely”. That means firms should hedge their FX risk to avoid “speculating on” a lack of a volatility.