(Bloomberg) -- British shoe manufacturer Dr. Martens Plc has caught a break so far this year, cashing in no matter which way the pound has traded.
The company is in the midst of a major period for buying shoe-making materials before the typically busy Autumn sales season. Sterling’s strength over most of this year means such products, sourced from outside the UK, are cheaper than otherwise.
Now the currency has pulled back from recent highs around $1.30 to $1.27. That’s nevertheless fine with the maker of yellow-stitched boots: The US is one of its biggest markets, so a weaker sterling means more transatlantic demand and the dollars that the company gets in US revenue will buy more pounds when the cash is brought back home.
But the outlook is far from certain, which helps explain why sterling’s dramatic swings have spurred plenty of business for London’s foreign-exchange traders. UK treasurers are racing to put on currency hedges to protect their companies’ earnings or to lock in among the strongest levels for sterling in a year.
“Nobody has a crystal ball,” said Mark Hirst, group treasurer at Dr. Martens. “I’m kind of half expecting it to go a bit higher. It could get to $1.40 again.”
While the currency is working in the company’s favor for now, it would consider tweaking its hedging policy if needed, Hirst said.
Banco Santander SA’s UK arm said corporate FX volumes were up 21% in July from a year earlier. Exchange rate risk-management company Argentex Group Plc said July was its busiest month for corporate hedging this year, and Barclays Plc reported a “notable” step up in activity.
About 80% of sales for companies in the FTSE 100 Index are generated overseas, the London Stock Exchange Group estimates, and earnings reports in July provided ample evidence that a stronger pound is becoming a headache.
British American Tobacco Plc said sterling’s strength dented its first-half profit from operations by £245 million. Engineering company Weir Group Plc warned of a £26 million currency-related impact to its operating profit this year, while heat treatment provider Bodycote Plc took a hit of more than £12 million from foreign-exchange movements on first-half revenue.
Reaching a big round number, as the pound did last month in strengthening to $1.30, adds to the impetus for hedges, bankers say, with exporters looking to protect against any additional rise, while importers also dash to stock up on inventory at cheaper prices or buy contracts to lock in the exchange rate at current levels.
“When you see those psychological levels, it’s normal for us to see clients be a bit more reactive,” said Mimi Rushton, head of global FX distribution at Barclays. “What’s interesting in this specific move and because it was tied up somewhat with the election, we’ve had a really good balance of importers and exporters who have been active.”
Despite sterling’s pullback, investors are still anticipating further strength. That’s true even after the Bank of England on Thursday lowered interest rates for the first time since early 2020, with markets turning more positive on the outlook for the UK after the Labour Party’s landslide election win July 4.
The pound has outperformed more than 90% of the world’s currencies this year. Last month it climbed to its strongest level against the euro since 2016 and the currency was the closest it’s ever been to erasing its post-Brexit referendum drop on a trade-weighted basis.
For Santander UK, where 60% to 70% of corporate clients are importers, demand rose for forward contracts, with companies looking to lock in the sterling-euro and sterling-dollar exchange rates for the coming months.
“We’ve had a really busy July; most importers have taken advantage of the pound rising,” said Neil Tandy, executive director for FX sales at Santander, adding that activity has been highest among small- to mid-sized companies.
Many larger corporations typically have mandates to hedge a certain portion of their currency exposure, regardless of day-to-day market moves. Drinks giant Diageo Plc says it buys hedges on a rolling basis for all major currency pairs, rather than speculating or reacting to swings in exchange rates.
Some smaller companies opt to take foreign-exchange matters into their own hands.
When in Rome Wine Ltd., an Italian wine importing company based in Stroud, has 85% of its revenue in sterling and 100% of its costs in euros. A 1% move in euro-sterling has a 1% impact on its margins.
“A 1% impact on our margin is highly significant for our business,” said Rob Malin, founder and chief executive officer at When in Rome. “We’ve certainly ordered more stock to take advantage of sterling’s strength.”
Still, for those with a more reactive approach to hedging, the change in government has boosted confidence to lock in protection for longer periods of time. Argentex said contracts going 12 to 24 months into the future saw a notable increase in demand.
“Since the Brexit referendum, you haven’t seen that much desire to hedge for the medium to long term,” said Abhishek Sachdev, CEO at Vedanta, an independent hedging adviser. “The political certainty that we now have for at least the next five years does provide some impetus.”
--With assistance from Kit Rees.
(Updates market pricing in third paragraph.)
©2024 Bloomberg L.P.
