Following our recent ‘Volatility in rates‘ webinar, Alex Chernoff, Executive Director at Global Reach, further discusses how volatility has been impacting businesses and how to effectively manage foreign exchange (FX) during these times.
It is clear that volatility has been impacting businesses and, given the prevailing macroeconomic events, it’s reasonable to consider this will continue throughout the remainder of 2022 and moving into 2023, posing significant volatility risk. Some of these risks include global inflationary pressures creating unpredictable shifts in monetary policy around the world, the resurgence of COVID-19 in China with a subsequent lockdown in Shanghai, and the ongoing Russian invasion of Ukraine, which is exacerbating the already unstable energy market.
Many of the recent and present market risks have led to a strong US Dollar. The US Dollar Index, which measures the Buck’s value versus a basket of other major currencies, has been trading at its highest level since May 2020 – the height of the pandemic*. It’s also becoming increasingly expensive to hedge as the US Federal Reserve is on an aggressive interest rate hike cycle, potentially at the cost of economic growth.
Given the Eurozone’s close geographic position to Ukraine, its reliance on Russian energy, and slower adjustment in monetary policy, the shared currency has been heavily sold, reaching multi-year lows versus the US Dollar and Pound Sterling*.
Meanwhile, the Pound Sterling has been losing ground, as the Bank of England has repositioned itself in a slightly more dovish position, stating growth concerns as the cause. The Pound Sterling has experienced several years of selling pressure moving from Brexit to COVID-19 and is now seen as a risk-on currency.
In reality there are many variables, some of which we’ve touched on above and are totally uncontrollable. While exchange rates can fluctuate dramatically in times of geopolitical risk and monetary policy divergence – of which the latter appears to have no short-term solution – the impact of FX volatility on known exposures to foreign currencies can easily be smoothed through effective planning and risk management.
Having a strong cash flow forecast and understanding of foreign currency exposures is important when looking to implement an effective hedging strategy.
Once these fundamentals have been established, hedging can be beneficial for businesses wanting to:
- Protect their bottom line
- Effectively plan in accordance with budgets
- Smooth the impact of FX volatility
- Take advantage of favourable exchange rates
With volatility expected to remain high, businesses with an FX requirement should consider speaking to a currency specialist to discuss how they could help mitigate currency risk. For more information, please contact Alex Chernoff at achernoff@globalreachgroup.com.
*Correct as of April 2022
