NI Trade Summit

Back to Basics -Managing currency risk in

uncertain times13th June 2017

Brian Telford – Head of Markets – Danske Bank UK

Twitter: @BrianTelford3

Linkedin: Brian Telford

22

Seeing over the horizon – are the risks increasing?

The “known knowns”, “known unknowns” and “unknown unknowns”

33

Why has the economy performed above expectations since the EU

vote?

Source: ONS

The majority of the

electorate voted

for Brexit

The UK’s

relationship with

the EU hasn’t

really changed yet

Brexit was not an

unforeseen event

44

55

Rising inflation is squeezing real wage growth and putting downward

pressure on households’ purchasing power

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2014 JAN 2014 JUL 2015 JAN 2015 JUL 2016 JAN 2016 JUL 2017 JAN

Pe

rcen

tage

ch

an

ge

(%

)

Real wage growth Consumer price inflation

Source: ONS

66

Brexit-related uncertainty is expected to act as a drag on business

investment

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f

Rea

l b

usin

ess inve

stm

en

t (%

ch

an

ge

)

Source: Danske Bank Quarterly Sectoral Forecasts 2017 Q1, ONS

77

We are forecasting economic growth of 0.8% in 2017 and 1.0% in 2018 in

Northern Ireland

NI UK NI UK NI UK

Q1 2016 0.9 0.2 1.3 1.6

Q2 2016 0.7 0.6 1.9 1.7

Q3 2016 -0.9 0.6 1.6 2.0

Q4 2016 0.5 0.7 1.3 2.0

Q1 2017 0.2 0.3 0.5 2.1

Q2 2017 0.4 0.3 0.3 1.7

Q3 2017 0.1 0.3 1.3 1.4

Q4 2017 0.4 0.3 1.2 1.1

Q1 2018 0.1 0.3 1.1 1.2

Q2 2018 0.2 0.4 0.9 1.3

Q3 2018 0.2 0.4 1.0 1.4

Q4 2018 0.6 0.4 1.1 1.5

Source: Oxford Economics

0.8 1.6

1.0 1.3

Q on Q growth Y on Y growth Annual growth

1.5 1.8

GVA growth

NI

UK

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Q1 2011

Q3 2011

Q1 2012

Q3 2012

Q1 2013

Q3 2013

Q1 2014

Q3 2014

Q1 2015

Q3 2015

Q1 2016

Q3 2016

Q1 2017

Q3 2017

Q1 2018

Q3 2018

(%)

Source: Oxford Economics Note:

excludes North Sea Oil

Source: Danske Bank Quarterly Sectoral Forecasts 2017 Q1

88

99

The funding Environment - Don’t panic – Plan!

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The funding Environment - Don’t panic – Plan!

It’s STILL all about cash flow:

Getting paid

Getting paid what you expect to be paid

Getting paid what you expect to be paid when you expect to be paid it

You cannot make the markets move but you can manage what market

movements do to your business

Let the strategy not the product drive the solution!!!

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The highs and the lows

FX volatility may mean

opportunities

FX volatility does mean threat

Competitive advantage in new markets

Business expansion potential

Alternative source for cheaper raw material

or labour

Growing margins

Overseas competition

More expensive raw materials

Reduced margins

Currency losses

Jobs exported

Boundaries to defend …

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So what has changed? Back to the future?

GBP/EUR Jan 15 – Jun 17

Source: Bloomberg

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Trend analysis

GBP/EUR Jan 11 – Jun 17

Source: Bloomberg

Source: Bloomberg

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Managing Currency Risk

Currency GBP/EUR – forecast – mid market

As of June 2017

Q3 17 Q4 17 Q1 18 Q2 18 2018

Mean 1.16 1.16 1.16 1.16 1.15

Low 1.06 1.00 1.05 1.09 1.02

High 1.23 1.28 1.39 1.28 1.30

Forward 1.15 1.14 1.14 1.14 1.13

Source: Bloomberg

Please note that these forecasts reflect the consensus view of a number of Market participants at a point in time,

are not a recommendation to transact and may not reflect actual rates at the various future dates.

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Why it matters – forecast range

GBP/EUR Jan 08 – Jun 17

Source: Bloomberg

Source: Bloomberg

1616

Why it matters

Currency GBP/USD - forecast

As of June 2017

Q3 17 Q4 17 Q1 18 Q2 18 2018

Mean 1.27 1.27 1.28 1.28 1.30

Low 1.18 1.18 1.12 1.14 1.10

High 1.34 1.38 1.42 1.38 1.50

Forward 1.29 1.30 1.30 1.31 1.32

Source: Bloomberg

Please note that these forecasts reflect the consensus view of a number of Market participants at a point in time ,

are not a recommendation to transact and may not reflect actual rates at the various future dates.

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Why it matters – forecast range

GBP/USD Jan 08 – Jun 17

Source: Bloomberg

Source: Bloomberg

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Don’t panic – plan! Developing a risk management strategy

Treat it as you would any other major business risk

Set out a vision or mission and identify the opportunities

Identify the risks and assign responsibility for resolution

Examine the alternatives

Agree a strategy — integrated with sales/marketing etc.

Eliminate/manage the risk

Review strategy periodically

Key consideration - keep the approach relevant to the scale and complexity of your

business

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General - key considerations

What is my strategy

• Am I a currency trader

• Should I hedge currency to support stability of earnings and grow organically

• Do I know my net exposure, when it arises and over what period?

• Is my competition in the UK or elsewhere? Will my competition face the same

currency issues as me or does it give one of us more or less opportunity?

• How important is the exchange rate? Can I work to a budget or will each deal need

individually priced? How do I do this?

• Will your business benefit overall from a weaker GBP, or might a weaker GBP drive up

input costs or potentially increase sales? Consider where do you buy from as well as

where do you sell to?

• In the medium to long term, do you see problems associated with trying to trade with EU

customers, e.g. additional tariffs? Might you need to consider alternative markets sooner

rather than later?

• Hindsight isn‘t always what its cracked up to be!!

2020

So do I have an FX risk – common assumptions and actions

I invoice in GBP, I don’t have a currency risk.

I let my customers worry about the exchange rate, they’re ‘happy’ to pay me in Sterling.

I just sell my currency as I get it, I have plenty of margin built in so I don’t need to worry.

No one else makes what I do so the premium I command removes exchange rate risk.

Renegotiating prices based on exchange rate changes can help but

will NOT in itself manage exchange rate risk

My competitors are ‘in the same boat as me’

The market is going my way, I’ll be fine.

Beware of Strangers bearing gifts

A product that begins life or ends up in a country other

than the UK carries with it some degree of exchange

rate risk for someone in the supply chain!!

Research

Plan

Action

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“Stick or twist” - How do we manage risk in uncertain times?

Is it safer to do nothing than do something?

Back to basics:

• The market is too volatile to hedge risk

• Simply doing nothing is not a strategy!!!!!!

• Determine the net FX exposure (size, currency)

• What is the budget exchange relative to the current spot or forward market – do you have one?

• When did the FX exposure arise – this is generally the point at which to hedge to minimise risk

• When does it crystallise, i.e. when do you expect to get paid?

• If you decided not to hedge understand the risk in ££££’s – opportunity gain vs. actual cost. Watch out for the ‘best bad price syndrome!!’

• If you decide not to hedge how likely do you think the markets will be where you need it to be when you need it to??

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Questions

2323

Important information

The content of this presentation is for information purposes only to help you decide whether or not it is

appropriate for your business to hedge any potential foreign exchange exposure.

This information does not contain any form of investment, tax or legal advice. It does not amount to

investment advice or make any recommendation in any financial instruments, investments or products.

It is not intended as an offer or solicitation. Before deciding whether or not to enter into a foreign exchange

risk management solution, we recommend that you take independent financial advice.

Spot transactions and forward transactions when used to cover a commercial position are not “designated

investments” as defined in the Financial Services and Markets Act 2000 (the Act) and therefore do not

benefit from the protections of the Act or the rules of the Financial Conduct Authority. Currency options,

even when used to cover a commercial position, are "designated investments" under the Act.

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Important information

This is a high level promotion only, charges will be discussed on an individual level.

Northern Bank Limited is authorised by the Prudential Regulation Authority and regulated by the Financial

Conduct Authority and the Prudential Regulation Authority.

This presentation is a financial promotion as defined by the Financial Conduct Authority’s Conduct of

Business Sourcebook.

Danske Bank is a trading name of Northern Bank Limited. Registered in Northern Ireland R568.

Registered Office: Donegall Square West, Belfast, BT1 6JS. Northern Bank Limited is a member of the

Danske Bank Group. www.danskebank.co.uk

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