How will the Q1 GDP figures affect the toy industry

Just before the Royal celebrations and while many were topping up their tans from the mini heat wave the UK experienced over Easter weekend, there was another reason to be cheerful; the UK had avoided the dreaded double dip recession.
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The main question that many toy manufacturers and distributors will be asking is; how will this affect my business with Christmas orders on the horizon? Is Sterling going to roar back like Optimus Prime and his trusty band of Autobots or will it sink just like Catwoman did at the box office?

The first reading of Q1 GDP reported growth at 0.5 per cent, pushing sterling higher but not quite to infinity and beyond as many would have liked. Whilst a proportion of the market was starting to question whether or not the UK could in fact face the daunting reality of a double dip recession, the market expectations were met as forecast. But the question remains, is the UK out of the woods yet?

On face value, the Q1 growth only erases the contraction seen in Q4 2010 (which was largely due to the snow). The simple fact is that growth in the UK over the past six months has been flat. This leaves both the Coalition Government and the Bank of England in a bit of a predicament. At this current stage it is hard to make the assumption that the UK will avoid going back into contraction in Q2 or Q3 this year.

The effect of the Royal Wedding (selling those Princess Catherine dolls) and good weather over the Bank holidays will go a long way to help keep growth in the toy sector fluid. However, the full effect of the austerity measures and many of the public sector job cuts have yet to take place - consumer confidence needs to be monitored closely as this is already near record lows.

So, despite the British economy pointing in the right direction, there is still the possibility of Sterling dropping in the future. Sterling is currently trading near its highest level against the US Dollar in 16 months. As a result, most toy importers or exporters, who deal with China or the US, may well be above their budget foreign exchange (FX) levels.

If this is the case and you want to hedge all or some of this exposure, then an FX forward trade would be a good solution to this problem. An FX forward allows you to book currency for a date in the future based on the current rates in the markets. This would mean that you don’t have the headache of questions such as, what if the UK economy starts to falter? Or, more likely ,what if the US starts to recover at a faster pace resulting in a stronger Dollar? The rate agreed on your FX forward would be fixed for that period of time. Of course, Sterling could still push higher, so it really depends on your appetite for risk. Alternatively, you could cover just part of your currency requirement with an FX forward and, should the market move higher or lower, you could aggregate your FX rate with further purchases.

One thing I do not recommend is doing nothing, buying only when the invoices arrive. If you know you have a definite large future currency exchange requirement every year - paying for that Christmas shipment - then this is the equivalent of pure speculation on market movements. With so many imbalances in the global economy and political uncertainties in the world, you have to ask yourself if speculation is a risk you can afford?

Jamie is a senior trader at Global Reach Partners, managing client trades as well as the businesses’ counterparty relationships. Jamie has a degree in Economics and is also an
 MSTA qualified technical analyst. He has over four years experience within the FX markets and delivers a daily commentary on currencies and the economic landscape, internally as
well as to Global Reach clients. Jamie is a regular in broadcast and print on the subject of import and export.



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