How does the foreign exchange market affect the fashion industry?

2020 was a rough year for the fashion industry. Fashion weeks were cancelled and flagship stores closed, while consumers had little to dress up for. Almost three quarters of its listed companies lost money – yet online sales surged. With the recent acquisitions of high-street veterans Debenhams and Topshop by online-only retailers, the shakeups look set to continue in 2021.

Impacts of the ongoing pandemic and now Brexit will be felt across national and international markets. The fashion industry is a globalised one, from design to manufacturing and retail. This makes factors such as shifting currency exchange rates – triggered by geopolitical instability like health crises and changing trade regulations – of great interest to international brands.

So how can they be affected, and what do they do to manage these risks?

How does currency exchange affect the fashion industry?

Currency exchange involves the buying and selling of different currencies across the world. Fluctuating exchange rates present opportunities to both make and lose money through the foreign exchange market – or FX trading as its commonly known.

For the fashion industry, changes in currency markets can affect company profits in a number of ways. Many brands source suppliers and labour from international markets, while luxury brands earn revenue in many currencies. The import of textiles (often bought in a season ahead), export logistics and the conversion of foreign revenues are all vulnerable to currency shifts that impact overall costs.

Some fashion companies will look to relocate production operations in response, but not all brands – Swiss watchmakers being one example – can. For those who do move their supply chains to cheaper regions, shifts in local and global currencies can still significantly impact manufacturing costs.

Currency fluctuations can also affect consumer buying behaviour in local regions, especially when combined with economic slowdowns as shoppers look for better value alternatives.

How do fashion companies manage currency exchange risks?

Large fashion companies use a variety of tactics to attempt to manage currency exchange fluctuations. Adjusting supply chains is one method discussed above, as is the shifting of regional priorities.

Other strategies include currency forwarding, which allows companies to lock in particular exchange rates with banks for up to two years and offset negative impacts of fluctuations. A similar option is limit orders, where fashion brands wait to make international payments until exchange rates hit a desired point to offer acceptable value.

With the current market uncertainty set to continue for some months yet, fashion brands will be doing everything they can to manage currency exchange risks and maximise opportunities. The future of the industry could depend on it.