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Given growing economic uncertainty in a number of markets across Europe, businesses are tackling slowing domestic demand by expanding their activities overseas. This emerging trend amongst companies in the region to find new products and markets is also borne out by HSBC’s recently released Global Connections trade forecast data, which shows that European trade is expected to grow by 80% to 2026, in a large part due to businesses seeking new international trade partners to help drive competitive advantage.

 

Expansion into new markets brings with it an element of risk and businesses are assessing every international transaction carefully.  This means that they are establishing the level of risk appetite they are prepared to accept on each transaction and taking steps to mitigate this exposure where it is found to be unacceptably high.

 

Foreign exchange (forex) is clearly a crucial element of this risk assessment, and is particularly pertinent where businesses are trading across multiple currency zones. Currently, our specialist global markets teams are working with businesses to help them re-evaluate their exposures, understand the solutions available, and develop and implement an appropriate strategy to ensure that despite volatile market conditions they are protecting their business’ profitability. Naturally, the best solutions are those specifically tailored to a business’ individual needs; for example while working from spot positions or locking into fixed rates can both offer benefits to customers, for many companies the most appropriate strategy is to work with a flexible combination of the two.

 

Interestingly, while our corporate customers are always conscious of the potential impact of currency fluctuations, we have not seen wholesale moves from financing in euros to US dollars as a result of recent uncertainty across Europe. An area where we are seeing change however is the growing awareness and interest in working in China’s currency the renminbi (RMB). Corporate customers are speaking to us about the benefits of invoicing their Chinese suppliers in RMB, as well as utilising other RMB trade instruments.

 

There is definite first-mover advantage here: HSBC research carried out last year with commercial banking customers in mainland China revealed that eight out of 10 companies, which hadn’t yet started using RMB to settle cross-border trade planned to do so in the future. For European businesses, opening conversations with Chinese customers and suppliers with RMB-based proposals will ensure that they stand out from competitors, while further diversifying currency holdings will allow businesses with receivables or payables in RMB to achieve a natural currency hedge. HSBC believes the RMB will become a top three trading currency by 2015: this growth, coupled with the ongoing deregulation surrounding its use, will impact on both the working practices and risk position of businesses trading with, or investing in, mainland China.

 

Foreign exchange volatility can have a huge impact on a business’ cash flow, forecasting and profitability. Businesses that have not already done so should prioritise working with their bank to ensure they have a full picture of their forex risk exposure and are adequately prepared and protected against any ongoing uncertainty.