Currency war shakes the margins of the fashion industry

The fashion industry has another battle to fight, currency war. Being a globalized sector in the supply chain and in its market make it extremely sensitive to the changes of the external trade. And now, currency war is another element that impact in its already affected margins.

One of the collateral effects of the trade war between the United States and China is the historic devaluation of the yuan, that not only affects its opponent but also the entire global commerce. American fashion retailers like PVH, Abercrombie or Tiffany already make eco of this scenario in its last results, but the impact of the dollar goes beyond.

Lats Monday, one day after the new tariff raise started to be operative, The Popular Bank of China reported in 7,0883 yuens the price of the dollar, being the weakest number since March 2008.  Overall, this strength of the American currency weakens the value of other currencies, specially the already weaken ones, like the emerging economies.

The devaluation of the Chinese currency drags the rest of the emergent economies’ currencies  

This devaluation gives, on one side more competitivity to the exports of this territory, but in the other hand, it cheapens its internal economy and drives up its imports. The Turkish lira, for example, lived last August a flash clash, meaning, an ephemeral drop of 12% in less than 24 hours, that later recovered.  

Turkey, popularly known as the textile manufacturer of Europe because it’s the closest in proximity to the continent, has lived this past year a turbulent year in its currency. The political uncertainty of the country sank its value 30% in 2018, and in what is gone of the year the Turkish lira has lost another 10%.

In the case of the textile industry, China, just like Turkey, has a solid value chain that goes from raw materials to the manufacture of garments, which makes them less sensitive to imports. However, other productive hubs very focused in manufacturing like Bangladesh, may be affected by this new context depending on the origin of their purchase.

China and Turkey, two of the counties with a weakest currency stability are the first and the third fashion suppliers in Europe

On the other hand, textiles in general is one of the hardest hits by the strength of the American currency because of the cotton, the second most used raw material in the fashion business. The United States is the world's leading exporter of this raw material and its price affects spinners and weavers outside this country.

In the middle of this battle, the euro continues to weaken, in its case, the wait of a new incentive’s politics from the European Central Bank. Last Sunday, the European currency dropped the 1.10 euros bar, since 2017 its minimum number in 27 months. Fears of Germany in the technical recession and the threat of Brexit without deal the low of the currency. Weakness of the euro will give amore competitive strength to the European exports but at the same time imports will become higher.

It will also destabilize the external trade of devaluation, also historic of the sterling pound. Submerged in a downfall path because of its current political chaos, the drop of the British currency penalizes European exports to the British market, the second in the region.

The stock of the pound, that started the year over 1.27 dollars, has dropped this week the 1,20 dollars bar, going to its minimum in three years. If it keeps going down, it will reach levels not seen since 1985.