Tag Archive for: EUR

My Currency Fundamentals for SMEs

| 24-12-2019 | by Pieter de Kiewit |

My Very Practical Currency Fundamentals for SMEs

In 2016 I informed you about my baby steps in dealing with foreign exchange exposure in a “baby steps article” on this platform. I was about to receive Euros from Switzerland and had to pay in GBP (British pounds) into the UK. Two things I learned about the fees of big banks if you transfer internationally into another currency:

  1. There is a transaction fee if you transfer money into another currency, in most cases a flat fee;
  2. The bank takes a percentage from the total amount to make GBP out of Euro.

My solution at the time was to open a GBP account to avoid both these costs. There is a monthly fee for this bank account and some simple math showed that was the way to go. Currently GBP is relatively strong and I do not expect any UK assignments shortly, so I have decided to close down the account. Time to dig in again. I have struggled with three major considerations.

Transferring GBP into Euro: struggling with the spread

If you go onto the internet to find out what the current exchange rate between two currencies is, you get a number like 1 GBP equals 1.20 Euro. So far so good. Banks and other financial services providers work with a so-called spread. They deserve a reward for their services so the price they pay for your GBP is lower than the price you pay them if  you buy a pound from them. The spread is the percentage over and under the number you will find on the internet.

I am not here to endorse any businesses but I can tell you that the percentages can differ substantially. One provider asked 0.7%, the second 0.3%. The second provider does not charge a transaction fee, the first one does. If the amounts are substantial and your margins are thin, this difference can be substantially!

The hassle

When I choose for the second provider, I have to open a new account, remember new passwords, hand in documentation and think about if I can trust them. In short: a hassle.

With my first provider I have relationship of decades. I decided to ask them if there would be a chance that they would lower their prices. As I am a small business owner, I do not have a contact person anymore. I sent three emails to three different mail addresses. The first was not answered, the second was answered with “I cannot help you” and upon mail number three I received a call. The service agent mentioned she could not help me but I should call a colleague at 3:30 pm and then I would be put in the waiting line. Call me old-fashioned but that is not how I want to work. So that is what I told her. I noticed she really wanted to help but at the end of the day I got the message that my transaction was not in the millions so I would not receive an answer and there was no price-lowering. Ok.

I am not a fan of bank bashing and think they do important work. And we do not want to pick up every recruitment assignment. It is not in our interest but also not in the interest of the potential client. I would have appreciated a better line of communication.

The Market

As you might have noticed, I do like my cost savings but let’s be practical. This year the conversion rate GBP – Euro has been at its’ lowest at 1.06 and at its’ highest at 1.20. So there is  a difference of 0.14. The difference in the conversion rate has been 0.4%. I now chose to invest time in how to do the conversion and with which provider. Market study, good timing and luck are much better ways to optimize your returns.

Final remarks

If you, as an entrepreneur, have to deal with foreign exchange rates it is good to know how the cost structures of banks are. Also it is good to know there are alternative service providers like XE, Ebury, NBWM and Global Reach Group. If your time is limited and the number of transactions low, dig in once and decide what works for you. If you have regular and/or substantial transactions, it makes sense to keep the topic on the agenda. In that case it might be useful to gather further information and consider risk mitigating strategies and learn more about hedging, derivatives, spots, forwards, et cetera. If you want to, I can open my network for you.

Good luck and I would like to read about your experiences,

 

 

Pieter de Kiewit
Owner Treasurer Search

 

De invloed van valutarisico’s is groter dan gedacht

| 10-09-2019 | Erna Erkens | treasuryXL |

“Valutarisico krijgt te weinig aandacht in de AGF-sector en dat is heel zorgelijk,” zegt Erna Erkens van Erna Erkens Valuta Advies. Juist in de AGF-sector wordt heel veel zaken gedaan buiten de Euro zone, bijvoorbeeld in Engelse Ponden of Amerikaanse Dollars. “Als je weet dat 1 cent koersbeweging in EUR/USD over USD 1 miljoen al bijna 8.000 Euro kost, dan moet je wat dat betreft heel goed op je winkeltje passen. Een koersbeweging van 1 cent in EUR/GBP over 1 miljoen GBP kost zelfs bijna 14.000 Euro.”

Erna constateert dat in de AGF-sector de kennis over valutarisico niet in overeenstemming is met de invloed die dit valutarisico op het resultaat van bedrijven kan hebben. Soms is er een gebrek aan kennis en wordt valutarisico zelfs een beetje eng gevonden. “Daardoor komt het onderaan de stapel te liggen, terwijl de invloed die het heeft op de bedrijven heel groot is.”

Zij geeft aan dat bij grote transacties kleine koersverschillen al gauw duizenden Euro’s kunnen kosten. “Het is echt zonde als dit onderwerp niet de aandacht krijgt die het verdient.” Erna draagt bij aan de bewustwording rond dit onderwerp met haar dagelijkse nieuwsbrief en de trainingen en workshops die zij geeft op dit gebied.

Marges
Specifiek in de AGF-wereld signaleert Erna dat er door te hoge marges vaak te veel voor valuta’s wordt betaald. Zij brengt de betaalde marges in beeld en kijkt of deze nog wel bij de huidige marktomstandigheden passen. “Als je bij een transactie van 1 miljoen USD 20 punten van de marge kunt halen, kun je 1.600 Euro besparen. Zeker bij AGF bedrijven waar de marges toch al heel klein zijn, is dit belangrijk.”

Afdekken
Ook observeert Erna dat nog heel vaak betalingen in andere valuta gewoon op de Euro-rekening binnenkomen of ten laste van de Euro-rekening worden betaald. “Je hebt dan geen enkele invloed op de koers.” Beter is om als er vaste contracten, bijvoorbeeld voor een jaar, zijn afgesloten deze te aan te kopen of te verkopen met een termijncontract. Dit maakt het mogelijk om nu – op het moment van de offerte of contract – de koers vast te leggen voor een datum in de toekomst. “Als bijvoorbeeld de Ponden een gunstige koers hebben ten opzichte van waarmee je hebt gerekend bij het afsluiten van je contract, kun je beter nu die Ponden al verkopen. Dan ben je valuta risico kwijt.”

Vaak wordt AGF ook geleverd zonder vast contract waardoor er vooraf geen inzicht is in wanneer de vreemde valuta betaling komt. Als er een verschil is in de datum dat het termijncontract wordt afgerekend en de echte geldstroom, kan een valuta swap dit probleem oplossen. “Daarin kun je de cash-flow regelen zodat het niet meer zoveel uitmaakt wanneer je klant betaalt. Een onzeker betalingstijdstip mag nooit de reden zijn dat een valuta risico niet wordt ingedekt.”

Brexit
Ten aanzien van de naderende Brexit geeft Erna aan dat het belangrijk is voor bedrijven om zich te realiseren dat dit invloed kan hebben op het koersverloop van het Pond en na te gaan wat voor impact dat kan hebben op het bedrijf en of men dit risico wil verzekeren. Dit kan worden afgedekt met een valutaverzekering maar Erna merkt op dat vanwege de geringe marges in de AGF-sector heel vaak de afweging wordt gemaakt om dit risico niet te verzekeren. Zij verwacht dat ongeacht hoe Brexit eruit gaat zien handelsland Nederland en handelsland Engeland elkaar uiteindelijk zullen vinden in die handel. “De vraag is alleen of je als bedrijf die periode kunt overbruggen vooral omdat in de AGF-handel de marges flinterdun zijn.”

Naar verwachting zal een eventuele koersdaling van het Pond omdat het VK de EU verlaat zonder overeenkomst leiden tot handelsbelemmeringen. “Het wordt moeilijker om als het Pond minder waard wordt producten in Euro’s af te zetten omdat dit veel duurder wordt.” Uiteindelijk verwacht Erna niet dat het VK de EU verlaat zonder deal omdat de belangen te groot zijn.

Erna Erkens

 

 

Erna Erkens

Owner at Erna Erkens Valuta Advies (EEVA)

 

 

Rainy day funds and moral hazards

| 28-03-2018 | treasuryXL |

Christine Lagarde – the chief of the IMF – stated recently that the Eurozone countries should set up a “rainy day” fund that could be used to protect the countries in a time of economic turmoil. As the IMF is seen as the lender of last resort to the world, her words carry weight. Economies are subject to a cyclical motion – going from bad to good and then back down again. Her opinion is that closer integration is needed between the Eurozone countries to protect them from the inevitable downturn when it arrives.

Closer Integration

To achieve this target, it would require at least the following steps:

  • Closer banking union – more mergers
  • Unified capital market
  • Universal deposit protection scheme that is pan-european
  • Integration towards a common tax system

Her speech closely echoes that of her fellow countryman – President Macron. However, whilst receiving support from Mrs. Merkel when making his remarks, he also met with objections from other member states. Countries such as the Netherlands and Sweden voiced their objection to what they perceived as “far reaching” policies, whilst ignoring the fundamental problems and issues within the Eurozone. Their concerns are centred around the public perception of the Eurozone – there has been a growing tide of populist sentiment expressed at recent general elections, together with the continued fallout from the financial and sovereign debt crises that has impacted on the economic well being of the citizens.

Implementation of this policy – according to the IMF – would entail an annual contribution of about 0.30-0.35% of GDP per member state into a common fund. This fund would then pay out in the event of an economic downturn. Given the aforementioned level of disenchantment among citizens, it would not be easy to implement this policy within every member state. Furthermore, whilst pay outs would be conditional on member states meeting certain criteria, the Eurozone has shown in the past that their criteria has been ignored and no sanctions were enforced.

This common fund, whilst being ring fenced, could have an impact on the functioning of financial markets. Just knowing that there is a fund that needs to earn a return could led to distortions in money markets. Also, who decides when a member state can draw down from the fund – the EU, the ECB, majority decision of member states?

And then there is the potential problem of moral hazard. A country could pursue policies that are imprudent, safe in the knowledge that there was a communal fund to save them. Given the record of certain member states since even before the inception of the Euro to deceive, this is not a matter to be taken lightly. Even when countries have be found to have cheated they have always received the help that they need, regardless of all the stated criteria that are in place. Countries that are performing well will have to pay proportionally more into the fund than countries whose economies are not doing so well.

10 years since the start of the crisis and almost 20 years since the introduction of the Euro, we are no closer to a collective harmony than before.

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Fiscal union and the Euro – a modern version of Helen and Cassandra?

| 28-02-2018 | treasuryXL |

There are many reasons for the creation of the Euro – mainly linked to memories of senior politicians who had experienced the Second World War, together with the fall of the Iron Curtain. Countries that trade together, share institutions, and a common currency, are less likely to declare war on each other seems to be the thinking. Furthermore, statesmen explained that economic and monetary union would lead to greater prosperity, increased employment opportunities for citizens and a higher standard of living. Cohesion, convergence, increased wealth and peace were certainly attractive points. So why, after 19 years, have the countries not achieved more convergence?

To truly obtain integration it was always evident that steps would have to be made towards fiscal union – monetary union was just the start. A fiscal system needs to be in place that ensures a form of stability – transferring funds from strong countries to weaker countries. Whilst the Euro has contributed to growth in trade between member states, and certainly citizens have been able to source and price goods and services without an exchange rate risk, it has fallen short on certain goals. Mobility within the labour market was never going to replicate that in America. The national boundaries might have gone, but the language and cultural borders are still present. Therefore, a shortage of labour in Poland, can never be met by an influx of Belgians and Spanish looking for work. Investment capital has certainly not moved as freely as anticipated – the idea that surplus funds from Northern Europe would flow freely to the South and allow them to strengthen their position in the marketplace has remained an idea.

As previously stated the expected convergence of different economies has not happened. In fact, it would appear that they have diverged. There is much information that can be found on the internet that explains how the countries in the South increased wages by a far greater factor than productivity after implementing the Euro. It appears that gaining wage parity with the Germans was more important than actually increasing productivity. These excess wages were invariably spent on well-designed, but expensive, German products resulting in trade deficits with the countries in the North.

Emmanuel Macron – the President of France – has vociferously stated that Europe has to be more politically integrated; have a common defence policy and armed forces; more regulation of business; and a transfer mechanism to transfer funds from rich to weaker countries – a fiscal union.

However, considering that the countries within the EU have actually diverged from each other on the basis of GDP, inflation, Government debt, unemployment etc. since the inception of the Euro, and even more so since the start of the financial crisis, there is an inherent danger in transferring funds.

The word transfer implies not only something going from A to B, but also from B to A. The disparity within the economies would mean that the transfer would only be going in one direction for a very long time in the foreseeable future. The political implication is profound – would people from countries that are considered rich accept a long term action that would see their wealth reallocated to weaker countries. Some supporters might say that this just a matter of semantics – however the consequences are far reaching and permanent.

Which brings us round to Cassandra – when recollecting stories from Greek mythology people have a good knowledge of the story of Helen of Troy. One of the minor characters, but a very important one, is Cassandra. She who received the gift of prophecy but was cursed never to be believed. She warned about the fall of Troy, the Greeks hiding with the Trojan horse and the war that would happen when Paris fell in love. No one listened to her. There are many politicians and economists who have previously tried to warn about the problems within the Eurozone. Some voiced their opinions even before the Euro existed – but their voices were also dismissed.

There have been more than 50 infringements by member states on the criteria of the Euro since its inception. No sanctions or punishment were ever handed out. To think that things will be different in the future is wishful thinking. In almost a decade since the financial crisis, there has been no structural solution to the inequalities within the Euro and their members. We are almost 10 years further and the differences are even greater and still not resolved. Further integration whilst not acknowledging and addressing the imbalances can only lead to further divergence.

If you want more information please feel free to contact us via email [email protected]

 

The strength of the EUR or the weakness of the USD

| 07-02-2018 | treasuryXL |

There has been a significant rise in the value of the EUR in the last year compared to the USD. From a low of USD 1.05 around the end of February 2017, the EUR has climbed up to USD 1.25 – representing an increase of around 20 per cent. Analysts are talking about the price rising above USD 1.30 later this year. All very good from the EUR side, but what is causing the EUR to appear so strong and the USD so weak?

It is fairly well known that the Fed could be looking to increase interest rates in 2018 – consensus is for 3 small rises throughout 2018. As EUR interest rates are negative, initially one would expect a large movement out of EUR and into USD. But it looks as if the economies are aligned in the same way and any rise in USD rates could later be followed by a rise in EUR rates.

A lot will depend on the announcements by the ECB to taper off its QE programme. Long term EUR yields are rising in possible anticipation, but are still far behind USD yields. There is a 2 per cent yield pickup in 10 year USD treasuries over Germany who act as the benchmark for the EUR.

The posturing of the US administration and the words of President Trump appear to be having a negative impact on the value of the USD. Statements from Washington about a weaker USD being good for the US trade have impacted on the market. Trump has been very critical about trade relationships with other countries. The words being uttered by the administration are certainly having a reaction on the markets.

The Dow Jones saw a sell off on Friday – it lost more than 650 points. The job report that was published showed that the US had added 200,000 jobs in January but, despite this good news, fear is growing that this will put upward pressure on inflation, leading to further rises in treasury bond yields.

However, there are potential hazards in the future for the EUR. General elections in Italy are due to take place on the 4th March 2018. Current sentiment within Italy shows a growing negative appreciation of the EU. The trials and tribulations concerning Brexit could also seriously undermine the strength of the EUR.

Whilst it appears that the USD is weak at present, any adverse news from with the EU could lead to a swift reversal in fortunes. The underlying sentiment would imply a weaker dollar, but fundamental changes in economic policy on both sides of the Atlantic could lead to rapid changes in sentiment.

 

If you want more information please feel free to contact us via email [email protected]

It’s India, you stupid

| 26-01-2018 | Rob Beemster |

In our daily business, we attend to corporations and institutions in their foreign activities.  We notice among our clients more and more attention and interest in India.  Several of our clients have invested in factories, what can be economically seen as Foreign Direct Investment in India. Others are increasing their sales and we also notice many newcomers who are firstly orientating on the country.

The policy of Prime Minister Modi is clearly opening the eyes of the international economic community. Indian corporates see chances of doing business abroad. These new economic partners built bridges to learn from each other, resulting in rising economic flows.

Many of our clients are active on the higher end of the agricultural value chain. They produce machines for vegetable processing, storage, cooling etc. India is known for its large waste of vegetable products; the government sees this as a big problem and it has to be eliminated. Collaboration of the Indians with institutions like the Worldbank and countries with decent knowledge in agriculture (like Holland ) are bound to find solutions to this waste issue. This “opening of doors” has resulted in the increase of Dutch corporate turnover with India.

And… there is a lot more to come. The spin-off from the agricultural segment to other segments can be enormous. India has tremendous opportunities for European corporations. The Dutch Embassy and the “Landbouwraad” in Delhi, are very active to help the Dutch in opening markets in India.

Non-Deliverable Forward

India has a much-regulated monetary system. Reserve Bank of India wants (full) control and insight on currency moves to or out of India. Hereby it has installed a so called non-deliverable forward system for off-shore rupee exchange. Currency hedging can be done, but not with regular forward contracts, where underlying amounts are bought and sold. At the end date of an NDF, the difference of the NDF price and the fixing is exchanged.

Currency risk

Very often the pricing in a tender and invoicing is done in Euro. So, one could say that currency risk is only ran by the Indian investor. “The European participants do not suffer due to eventual currency movements of Indian Rupee against the Euro”. One has to realize that if counterparty runs the full currency risk, there is still an indirect risk position for the supplier. So even the Euro receivers have to take a defensive stance.

Volatility

The necessity of taking care of the currency risk is because of the large volatility of the EUR/INR. It is dangerous to put all the risk at the Indian partner. Orders can be cancelled due to big swings in the value of the currencies. Profit margins of your client can diminish, which may end the relationship. The graph shows the rate moves of EUR/INR of the last five years. Even on short periods, large differences can be noticed. This should assure businesses to take full control of the currency risk. Rate changes of more than 10% within half a year have occurred several times.

Your guide in India

Transactional risk can be avoided by a good hedging structure. Economic currency risk on your long-term investment is another issue and has to be thoughtfully considered. Barcelona can help to make the hedging transparent. As said, hedging can be done but needs accurate and professional advice. Due to our experience in the Indian business of our clients, we are able to find the best solution for each trade or investment.

 

Rob Beemster

Owner of Barcelona valuta experts BV

 

What will be the new “normal” for interest rates?

| 23-01-2018 | Lionel Pavey |

Despite interest rate being very low for the last few years, general consensus is that rates will eventually rise – rates will become more normal. Rates are being held down by the actions of central banks with their quantitative easing. As QE is scaled backed and stopped this should allow rates to rise from their current low levels. The big question is – how high will rates rise? The Euro is not yet 20 years old and that means that whilst there is a lot of data, it does not require looking through 50 or 60 years of data to try and find the norm.

From a high of just over 5% in the summer of 2008, 10 year swap rates have fallen to a low of around 0.25% in the autumn of 2016 and are currently just under 1%. Historically, it has been usual to describe prices as moving back to around the average. However, having just under 20 years of data, it is possible to analyse the average fairly quickly.

The average rate for 10 year swaps for the last year is about 0.80%
The average rate for 10 year swaps for the last 2 years is about 0.70%
The average rate for 10 years swaps for the last 5 years is about 1.15%
The average rate for 10 year swap for the last 10 years is about 2.20%
And the average since 1999 when the Euro started is about 3.40%

The lowest rate was about 0.25% in 2016
The highest rate was about 6% in 2000

What is normal? From a personal point of view when I took out my first mortgage (back in the previous millennium) the advice I was given was that if long term fixed rates (10 years) were lower than 6.5% I should look to lock into that rate as the long term average was 7%. With every other property that I subsequently bought the long term fixed rates were lower than with my first mortgage. Currently mortgage rates for 10 year fixed are around 1.75%. Long term interest rates have been steadily falling for the last 30 – 35 years.

So, when we talk about rates eventually rising, we are still left with the problem that previous benchmarks – which were normal then – may not be applicable anymore.

A rate raise is absolute – the magnitude and its impact will be relative to our perception of the new “normal” benchmark.

Lionel Pavey

 

 

Lionel Pavey

Cash Management and Treasury Specialist

 

Foreign currency hedging, a protection of cash flow

| 25-10-2017 | Rob Beemster |

Currency volatility is a well-known uncertain component of international business. In the pre-euro era one could suffer severely by currency movements of its European neighbours. Corporations, dealing within euro countries, have diminished the currency exposure.

A historical overview of the euro versus the us dollar

Looking back over the last 60 years, we can see that from 1958 till early 1970s there was  stability due to the Bretton Woods golden standard. At the end of this, the Vietnam War made it impossible to keep the dollar relation to gold. Early 1980s, the Reagan administration introduced a new economic policy; Reaganomics. Lower taxes and high governmental expenditure. This created a huge mess in America’s monetary situation. Interest rates went to enormous heights, the dollar climbed to unknown levels against the yen and European currencies. American exporters could not sell their products due to this high dollar.

Why the attention to Reaganomics? Well, the Trump administration is a vigorous trailer of the Reagan policy. Lower taxes might be introduced soon and Mr Trump also wants to invest heavily in infrastructure. Obvious, some similarities with Reagan. The new helm of the Federal Reserve Board will soon be appointed. When the board will have more hawks than doves, interest rates might raise sooner than expected. This might have consequences for the dollar and we may see here a reflection of the early 1980s.

 Trump and the us dollar

It is known that President Trump regularly protests to so-called currency manipulators like China and Germany. Their trade policies are in his view unacceptable. Due to this view of Trump on currencies, it will be questionable whether he would tolerate a higher dollar at all. The highly unpredictable Trump policy makes it impossible to judge in what direction the dollar will manoeuvre.

 The highly volatile euro/us dollar

The dollar has fluctuated severely since the euro introduction in 1999. ECB’s first President, Mr Duisenberg was facing tough times as the euro went from its introduction level of 1.17 to the low of 0.8350 a couple of years later. His world trip to recommend the euro as world reserve currency  has realized a demand from authorities to stock euro’s in their currency reserve system. The aggressive build-up of FX reserves by Asian monetary authorities has helped to revitalize the euro. Duisenberg made it happen that the currency went up from low 0.80s to almost 1.60 against us dollar in a couple of years. This occurred not so long ago!

 Two examples of neglected currency risk

1, many corporations have changed its landscape to the global market. A lot of exporters are billing their products in euros. A currency risk is obvious when these companies focus on one target area. Clients may find the products too expensive when euro is rising. So one runs indirectly a currency risk. Many countries have linked their currency to the dollar, so a change in the euro/us dollar may have consequence on your sales.

2, trading with China and agreeing to do the transfer in dollars, does not really mean that the risk exposure is in dollars. The transfer risk is in dollars, but the real currency risk is in yuan. Say, the European importer buys goods from China and both have agreed to do the payments in dollars. The Chinese counterparty will adjust the price of the goods when yuan moves against the dollar. The European corporation should install an us dollar/yuan currency risk hedging policy.

Don’t underestimate the course of currencies

Being an active international corporation is not easy, many components are changing markets constantly. Internet makes markets more transparent then ever thought, automation changes the landscape, consumer behaviour is sometimes not logical and newcomers/interrupters create new markets. Within this one has to deal with currency volatility. But this is a component one can conduct. Foreign currency strategy is essential for any internationally active corporation. Currency volatility cannot be underestimated and needs control.

Barcelona valuta experts can help you to create a decent foreign currency strategy. Call us on +31.654981315 or mail us via [email protected] for more information.

 

Rob Beemster

Owner of Barcelona valuta experts BV

Brexit – hard or soft? What does it actually mean?

| 20-9-2017 | Lionel Pavey |

Brexit is a fact, no news here. Discussions about how this Brexit is going to look like are an ongoing topic in the newspapers. Hard Brexit or soft Brexit – what does it actually mean for the UK and the European Union? What are the consequences of a hard Brexit compared to those of a soft Brexit to all of us? It implies there are 2 paths that can be followed – actually there are 3.

3 paths

  • No deal
  • Hard – should really be called a clean Brexit
  • Soft – should really be called unclear Brexit

No deal

This is exactly as it says – if no deal is reached between both parties. UK would no longer be obliged to follow EU law and treaties. This would lead to a period of uncertainty and confusion and new treaties would need to be implemented, whilst both sides would not be receptive to each other. The EU could still try to pursue UK through international courts for monies that it felt were still owed. Highly turbulent, but could happen.

Hard

Leaving the EU by mutual consent but not actually agreeing on the future, UK would no longer have to observe the pillars of the EU that currently prevail. This includes such issues as immigration, free movement, asylum, fisheries and agriculture to name but a few. Trade would fall under WTO rules until a mutual trade policy could be drafted.

Soft

This implies links being retained between both parties, specifically towards trade. It would mean UK would gain entry to a tariff free EU market, whilst accepting free movement of people. UK would have to pay for entry, whilst being denied a vote in EU matters.

Scenarios and consequences

So, what are the chances of these scenarios and many others happening?
To answer that question we have to go back to the actual question asked at the referendum – “Should the United Kingdom remain a member of the European Union or leave the European Union?”
The wording is very important – it was not worded should we leave the EU; yes or no. This was to remove any bias in people’s comprehension as to what they were voting for. As the majority of the electorate voted to leave the EU, this makes any attempt at a soft Brexit difficult to justify against the vote of the people. Any agreement where UK pays the EU and accepts EU rule negates the referendum question.
If the referendum is negated by the actions of politicians against the will of the people, then this could lead to a crisis in the country. Flagrantly ignoring the will of the people could lead to social and political unrest.
Politicians in the UK work in Parliament, work for their party and also, very importantly, work for their constituents. A MP has to make him/herself available to answer questions from their constituents.

In the UK, voting, whilst primarily for a political party, is specifically for your local MP who represents you in Parliament. It would take a very brave (or foolhardy) politician who would ignore the will of the majority of the people. That is not to say that it could happen, just that the consequences are far reaching and difficult to predict.

The divorce settlement

The EU is demanding a sum of money from UK (currently thought to be around EUR 100 million) to settle outstanding commitments. As the 2 were never legally married, it appears an affront to demand money. UK was entitled to grant a referendum, allowing the people to decide, and no laws have been broken. The argument used by the EU that there is an agreed rolling budget for the period of 2014-2020 makes it appear that it is set in stone and can not be changed. Based on current UK contributions and the fact that they will leave in 2019, then EUR 100 million sounds excessive for the 1 remaining year of the budget.
Furthermore, if the EU wishes to pursue a divorce settlement, then UK can look at obtaining their rightful share of the assets of the EU – that also happens in a divorce. UK has been a net contributor to the EU budget for the last 40 years.

What are the consequences for all involved?

Markets will remain volatile – uncertainty will prevail at least for the next 18 months. Certain markets and countries will be badly affected – the EU fishing industry will certainly suffer if the UK exercise control over their maritime waters. Banking will be in a state of flux – will large banks leave UK and resettle in EU to have access to EU markets? Where will settlement of EUR transactions take place? German car manufacturers could be denied access to one of their top markets or face stiff tariffs to import their vehicles into UK. Will we be able to freely move and live where we want to, whilst seeking employment or claiming benefit?

The chances of forming any agreement within the next 18 months are small. There is so much that needs to be agreed upon in a relatively short time frame. If the will of the people is to be honoured, then one must draw the conclusion that the end result will be a hard Brexit.
If UK politicians choose for a Soft Brexit, then they could face the wrath of the people and a second Glorious revolution could happen, though I do not see Rutte playing the role of the Prince of Orange.
He, after all, ignored the will of the people over the Ukraine referendum…

I always try to write from an objective point of view. Being English by birth, I realize that a lot of what I have written can be perceived as subjective.I was unable to vote in this referendum but, if truth be told, I would have gladly voted to leave.
The EU has lost its way and further integration will eventually lead to fiscal union. This would result in a permanent transfer of wealth from the wealthy countries to the poorer. There would be no incentive for poorer countries to improve their economies – the rich will pay.

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist

 





More articles from this author:

The end of the Euro as we know it – When the party ends?

The treasurer and data

Managing treasury risk : Risk management (Part I) (Parts II – VII to be found on treasuryXL)

Blockchain Innovation Conference 2017- An inspiring event

Treasury for non-treasurers: Data analysis and forecasting – seeing the future by looking at the past (Part I)
(Parts II – III to be found on treasuryXL)

Building a cash flow forecast model

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Trump’s determination to protect American business

| 14-8-2017 | Rob Beemster |

 

Many negative issues surround the President of the United States.  Approval rating hits new low,  surprise on his erratic conduct seems to grow daily. Trump is a unique politician. He is incomparable to any other western political leader. I want to pinpoint his monetary policy in 2017, by looking at the pattern of the dollar so far this year.

The dollar in 2017

Currency pair             January 2017              August 2017               Relative decrease USD

EUR/USD                    1.05                            1.18                            12.4%

AUD/USD                    0.72                            0.80                            11.1%

GBP/USD                    1.22                            1.32                            8.2%

USD/JPY                      1.18                            1.10                            6.8%

USD/CNY                    6.96                            6.70                            3.7%

Maybe Mr Trump does have a foreign economic policy.

He sees the results of Chinese manipulation and soft American response as an unfair trade relationship. The President of the US must do something about these unbalances. At least, this is how Trump judges.

Let’s take into account this Potus is a streetfighter. Long bilateral meetings with the Chinese are not options for Trump. Fast and furious, that it is: Bring the dollar down!!
And this is going on for half a year now. It is going the Trump way. Tough (but efficient)!

How to see the future value of the dollar?

The current outlook for the dollar against its main trading relations is related to some issues:

–          Process of QE by ECB, and  Euro interest rates

–          North Korea

–          China’s position in this geopolitical stress

–          Economic conditions of the US

–          Economic conditions of the main trading partners of the US

These are very important to determine the future value of the dollar. But this is the holistic view, we are all used to. Let’s be flexible and take a different stance. Just conclude as Trump will do. Be his alter ego.Then the most important issues are:

–          Pattern of the Euro against the dollar and the bilateral trade balance between US and Germany

–          China’s reaction to a lower dollar

–          US trade balance

–          US corporates repatriation of overseas cash

–          US investments to produce within America

–          FDI (Foreign Direct Investment) in America

This is a totally different scope. If we want to understand Trump, then we have to use his view on the international arena. The above mentioned bullet points are crucial. All can easily be measured, Trump loves that. I would like to go through these points to be able to clarify the possible outcome of the dollar for the coming time.

Pattern of the Euro against the dollar and the bilateral trade balance between US and Germany

The more than 12% revaluation will have a serious impact on the trade balance between US and Germany. When the correction emerges, Trump might temper his view on Germany. When we notice correction in the trade data, the dollar has gone far enough…

China’s reaction to a lower dollar

So far the yuan has gained some territory but not as much as other major currencies rose against the dollar. How will PBOC and the Chinese Government react on Trump’s wishes to correct the trade balance by a devaluation of the dollar against the yuan? If they take action on Trump’s stated requirements, whatever this may be, then pressure may diminish.

US trade balance

For many years the US  faces a deficit on its trade balance. The more than $500 billion yearly shortage is a notable pain point. If a remarkable achievement can be noticed on short term, a more relaxed dollar attitude may be expected.

US corporates repatriation of overseas cash

In history, attempts have been organised by US governments to return overseas cash of US corporations. During President Bush jr Presidency, corporations did repatriate cash. When Trump does decrease the corporate tax tariff to  15% and he rewards the US corps to transfer their money back to the US without any other penalty payments, a large repatriation may get going. Many of these funds will until now be held in local currencies, so a switch to the dollar may occur.

US corps return back to America

Trump has ordered US companies to produce in the US instead of overseas. If he becomes successful by bringing factories back to the US, the trade balance will shift, employment will improve. Also when large repatriation is done, these funds can be invested in local factories.

FDI in America

Many non-US corporations are scared by the threat of the US government that regulations like import tariffs and other taxes may be charged on imports. It will damage the advantage corporations have experienced last couple of years due to the high dollar. If special import tariffs are installed, investments may be done in the US to avoid these special expenditures. Onshore producing on American soil will become an alternative.

How to manage this?

Foreign currency management has always been a hard part of the international business. Currency moves are unpredictable. But since Trump, one has to be aware of non-economic issues as well. Note that all the above mentioned issues can have effect on the value of the dollar. Professional guidance of your flows is becoming more and more important. Barcelona valuta experts helps you to install a decent strategy to counter unpredicted events. We guide you in protecting the cash flow.

 

Rob Beemster

Owner of Barcelona valuta experts BV