The gradual emergence of the renminbi (The official currency of the People’s Republic of China) has been one of the more significant developments to occur in the wake of the world recession. It is now accountable for 2.2% of all foreign exchange transactions. The UK and China have agreed to allow sterling and the renminbi to trade directly against each other, while there was an easing of regulation to encourage Chinese banks to locate to London. The renminbi is becoming a serious global player and with no surprise, it’s backed by one of the world’s biggest economies. There have been efforts to ensure London becomes a significant global trading centre for the Renminbi, showing just how important this currency has become.
In 2009 the pound exchange rate was, £1 / $1.39. Currently, the pound exchange rate is £1/$1.63, showing evidence of economic growth for the UK. This increase in GDP means imports are cheaper for the UK, and exports are more expensive (countries buying goods from the UK have to pay more) benefiting the UK economy and increasing the GDP & GDP per capita. The pound is seen to almost be a currency that behaves in relation to what others are doing, so there is a big emphasis on the UK to improve and sustain export performance.
The UK exports products such as chemicals, cars, medicine and wines, but also services, such as financial and communication services. In 2013 the biggest UK export was financial services with 39%. With London being the leading centre for banking and finance, and becoming more recognised for its technological presence, it is rapidly becoming a popular location for entrepreneurs and tech firms, which will add to its export value.
Currency doesn’t have to be a physical product though, shown by virtual currencies such as BitCoin. There’s a growing demand from consumers to use such virtual currencies, particularly for online, cross border payments. Being able to engage in anonymous transactions across long distances will benefit many consumers, meaning virtual currency is the choice for some businesses. During 2013, the value of all BitCoins in circulation is said to be in excess of $1.5bn, showing just how popular virtual currency really is. Currency is changing all the time, from the introduction of £5 coins, currency only useable online, and even talk of plastic bank notes by 2016!
Businesses who engage in international trade must be able to effectively transact in other currencies, however many are not. The degree of volatility and uncertainty around currencies during the past few years means more businesses are starting to understand just how significant exchange rates can be, and many employ a form of strategy when working with exchange rates. It’s hard for a business to predict the best times to exchange a currency, and the wrong decision could have a significant impact on profits. Many businesses just deal at a base rate, where funds are locked in and delivered to the recipient straight away. However, some businesses (mostly medium to large businesses) use different methods such as ‘loss stopping orders’, where exchange rates are locked in but delivered at some time in the future. This allows the business to wait until the exchange rate is at the right level, minimising costs and maximising their profits.
Currencies (exchange rates) will change in value every day, and this is an important factor for businesses that are trading overseas to take into account, as it may have a significant impact on costs, and profit. London is rapidly becoming an important global trading centre for financial services, and the easing of regulation announced by George Osborne will see an increase in overseas banks moving to London, which will have a favourable impact on the UK economy and contribute to a steady, but stable rise in GDP.