In recent times, Australian businesses with global ties have experienced a prolonged period of uncertainty, riding out everything from Trump’s unpredictable administration to Theresa May’s shock call for a snap election. The French election for presidency is no exception, with Marine Le Pen now through to the second round of voting.
The far-right candidate is clear on her position: if she wins the vote, she will move to withdraw France from both the EU and the single currency. As a result, a Le Pen victory in the French election would have a significant impact on the euro – making this vote one to watch for any Australian business trading with Europe.
Though a Le Pen victory isn’t now looking likely, the past year has shown that it’s always worth having a plan ready for a shock result. Here’s how to get a solid foundation in place, ahead of any potential hit to the currency markets:
Pay attention to key dates, and keep an eye on the news
2016 showed us that opinion polls can’t always be relied on for an accurate prediction of election results. But there’s still much you can gain from following the headlines, keeping your eye on developments as they unfold.
This is particularly true for key dates in the two-round French election. Plugging these into your calendar will give you the breathing space to make smart, relevant decisions ahead of time, rather than being backed into a corner by an unforeseen turn in the tide.
Market experts have suggested that we may see capital flight from France during voting, as investors move their money away from political risk and towards ‘safe-havens’. If this happens, the euro would be left exposed. Of course, if Le Pen wins the vote, we are likely to see the euro take a plunge.
For Australian importers buying from Europe, this would be positive news – but it could throw up problems for those exporting to the single market. If the National Front candidate is knocked out of the running, the euro would likely rebound as confidence returns to Europe.
A robust currency strategy is essential to protecting your business from either outcome.
Build a strong, defensive strategy
The French election will likely affect the Euro no matter who wins, though a Le Pen victory would lead to a more dramatic outcome.
As a result, any Australian business trading with Europe should act now to build a strong currency strategy that protects their bottom line from either outcome. Typically, a robust strategy involves a combination of the following currency tools:
This is a good choice for businesses that can wait for the current exchange rate to move in their favour. With this tool, businesses nominate a preferred exchange rate, and wait for their funds to be automatically transferred as soon as it is reached by the market.
Forward contracts offer businesses the chance to limit their exposure to future shocks to the market – valuable when volatility looks set to hit. This is done by locking in today’s exchange rate for transfers up to a year in the future, which means you can build a barrier between your business and any unfavourable moves in the market.
Spot trades are made on the day, at the current exchange rate. They can be a great addition to a currency strategy for businesses with an appetite for risk – by reserving some funds for on-the-spot transfers, you won’t miss out if the market does end up moving in your favour.
It’s not a case of one size fits all, so you need to do your research or bring in a specialist to help design the ideal strategy. All the same, it’s highly likely that a combination of the options above will offer you peace of mind.
Consider partnering with a specialist
Businesses with little experience of foreign exchange should seek advice beyond their bank provider, from an expert who can tailor a currency strategy that meets their company’s specific needs and appetite for risk. Tailored currency strategies are useful in uncertain times, particularly when political risk is on the cards.
Don’t assume you’re covered
If you don’t trade directly with France, it could be easy to assume that none of the above will affect your business.
But if you’re involved in any kind of European trade, a Le Pen victory could have ripple effects that hit you hard. If you’re not sure how you’d be affected, it’s worth seeking the advice of an expert who can assess your exposure to risk and help you decide whether you’d benefit from building a personalised currency strategy.
As they say, it’s better to be safe than sorry. Doing your due diligence now will help you put your energy where it’s needed – continuing to build a strong, successful business, and not fighting the fallout of a political shock.
About the author
Jake Trask is FX research director at OFX , a specialist international transfer company with individual and corporate clients.