Brexit’s effect on international trading

An insight by Godi, an fx services company

There isn’t a financial media outlet in the world that hasn’t at one time or another reported on the Brexit vote of June 2016 and it’s repercussions since. In fact, it’s fair to say that there is hardly a day that goes by that the dreaded ‘B’ word isn’t mentioned. It has grasped the UK population’s attentions and it’s hard to remember in recent times a more prominent and important political event.

As Britain continues to negotiate its exit from the European Union (EU), political figures from both sides, as well as commentators and the public alike, are vigorously debating whether Brexit will be beneficial or catastrophic for the UK in the long term, and of course for Europe. What can’t be argued is the initial effect it has had on the Sterling currency.

Future uncertainty is generally seen as a bad thing for the majority of financial markets. If there is one thing the Brexit outcome has created, its uncertainty – another buzz word used regularly since Brexit. The depreciation in Sterling versus its major peers over the last 14 months can be largely attributed to uncertainty. Leaving the EU has discouraged inward investment to the UK and as such there is less demand for buying Pound Sterling to invest in the UK.

From the moment the ‘Leave’ camp secured its momentous victory, Sterling slumped overnight by 8% versus the Euro and 12% versus the US Dollar. This affected businesses without a suitable FX hedge in place immediately.

In the coming weeks we saw further volatility as investors tried to second guess the future implications of the result. This led to a ‘flash crash’ in October 2016 when Sterling dived once again on the back of algorithmic computer trading. Those UK companies, especially importers that rely on a strong pound to help their bargaining power, were suddenly faced with a vastly different marketplace to that of three to six months earlier.

Of course, an event like Brexit doesn’t happen very often and over-exaggerated movements in the markets do occur regularly – fear and nervousness tend to have that affect. Very soon after the ‘flash crash’, investors and traders saw the Pound as relatively cheap and as the dust settled, Sterling rallied aggressively against its major peers up to the end of 2016. All looked to be going rather smoothly until Theresa May firstly invoked Article 50 – the official commencement of Brexit negotiations – and secondly the snap UK general election.

Once again the currency was thrown back in to uncertain waters. At the time of writing, the Pound is back to levels from the ‘flash crash’ against the Euro (£1:€1.10) but faring better against the US Dollar (£1:$1.30).

It should be said that President Trump may have something to do with this as the US Dollar is under pressure due to political disruption in the White House. The Euro is also seeing something of a renaissance of late and strengthening exponentially against its peers, a move that is baffling many analysts. The Eurozone is far from settled and it can only be a matter of time before financial and political developments rear their ugly heads again.

The Italian banking crisis and Greece spring to mind and the German elections in September 2017 are eagerly anticipated.

Ultimately though, how the UK leaves the EU and what type of Brexit is negotiated is the key driver behind the overall uncertainty and volatility in Sterling.

A ‘Hard Brexit’ would likely see the UK abandon full access to the single market – the ability for foreign companies to export from the UK to Europe without tariffs and non-tariff barriers – and the customs union. Instead those companies may favour relocating to a country that is within the Single Market. This was one of the ‘Remainers’ top arguments and predictions, although as yet it has not transpired.

Granted we are still at the early stages of the negotiations and nothing has been confirmed yet. Leaving the customs union might lead to a significant rise in checks on goods passing through UK borders and as such, it is thought large global countries such as the United States, may in fact work on new trade agreements with the EU before they will with the UK.

Hard Brexit supporters point to the fact that by starting afresh, the UK will be able to negotiate individual trade agreements with the many member states of the EU which may in turn provide the UK with an unprecedented opportunity to nail down deals that are better suited. This unfortunately, will only be revealed in time.

A ‘Soft Brexit’ is quite simply an approach that would leave the UK’s relationship with the EU as close as possible to the existing arrangements. The UK wouldn’t have presence in Brussels in the form of MEPs – that’s a given – but it would continue to hold access to the Single Market. Goods and services would be traded with the remaining EU states on a tariff-free basis and financial firms would keep their ‘passporting’ rights to sell services and operate branches in the EU.

Britain would remain within the EU’s customs union, meaning that exports would not be subject to border checks. The ‘Norway Example’ is regularly scrutinised. Norway isn’t a member of the EU but does have access to the single market by being part of the European Economic Area (EEA).

In reality and in all likelihood, we will probably end up with a position that is neither one side or the other. There are obviously a plethora of details to thrash out and there is no black or white answer to it as a whole.

On a wider scale, there is the assumption from many ‘Remainers’ that a large amount of Brexit votes were based on immigration, and in particular the ease at which EU workers can access the UK based purely on their EU passport alone.

Rightly or wrongly, this was high on the propaganda list for the Brexit campaign and it seemed to strike a chord with many. Of course, this goes back to the Hard and Soft Brexit debate. A harder Brexit will indicate that more stringent checks will be implemented for EU citizens to work in the UK and the effects seem to be already filtering through. In June 2017 it was reported that applications from EU nurses to work in the UK were down 96% since the Brexit vote.

As mentioned before, a softer Brexit would remain similar to where we are at the moment whereby EU workers would still be able to work in the UK without many constraints or hurdles to overcome. This of course would likely irritate many of the 52% of the UK population who voted for Brexit in the first place. It really is an interesting time which no-one yet knows the ending.

For UK businesses that have dealings with overseas third parties, whether that be with suppliers or clients, international trade will continue regardless – it has to.

That being the case, SMEs that are open to market fluctuations due to Brexit – from currency movements through to VAT and customs duty alterations, need to actively assess and audit their business model and make sure they are protected against the upcoming obstacles ahead. It’s wise for businesses to look to partners that have the expertise and capabilities to help manoeuvre them through these turbulent times.

Having a network of trusted partners and specialists that have a wide breadth of experience, expertise and knowledge is a modern business imperative for a SME.

Godi Financial is one example of a specialist company who are effectively supporting SMEs – helping them to put in place appropriate currency hedging strategies while also reducing all the costs associated with FX transactions – a service that banks and traditional FX brokers have been lacking to provide.

Government-backed, UK Export Finance, is another organisation of note and are set up to ensure that no viable UK export business fails for lack of finance during these uncertain times.

Businesses that have international dealings, no matter how big or small, need to make sure they spend quality time looking in to all the different aspects of overseas trade and making sure they are protected as much as they can be. There is only so much off that they can do themselves. It’s vital to work with the right partners to make sure each business can continue to be great at what they do.