It’s been a volatile year for currency markets, with plenty of surprises. In January, the Swiss National Bank abandoned the Swiss franc’s peg with the euro, introduced in September 2011. Within minutes, the franc soared by around 30 per cent against the euro, hitting the country’s stock market as the effect of a much stronger currency on Swiss exporters’ profitability was digested.
China’s sudden devaluation of its currency, the renminbi, followed in August. This had an equally significant impact, prompting stock markets to tumble around the world (as investors worried that the Chinese economy was growing more slowly than previously thought). Add to this oil prices taking another leg lower during the year, dampening inflation, and it’s been a heady mix for currency markets in 2015 so far.
Other FX moves have been less dramatic but no less important. Expectations drive currency markets, and these expectations can shift drastically on news of economic performance and central bank intervention (or signalling of future intervention). In simple terms, a currency will tend to rise in value relative to other currencies if monetary policy is expected to be tightened in the near future and vice versa.
Sharp and uncertain moves can be problematic for entrepreneurs and businesses if they’re trading or own assets across borders. A 7 per cent profit margin, for example, could easily be wiped out by an equivalent move in FX markets, so anyone trading in today’s globalised world needs to pay attention to these risks as part of their business strategy.
This is particularly important when the economic health of different countries and the actions of their central banks are diverging, therefore driving currencies more sharply in different directions.
Given current global conditions, with many emerging markets slowing or in recession and the Eurozone struggling to pull itself out of deflation territory, monetary easing has been a well-used tool. The European Central Bank introduced QE earlier in the year, sending the euro lower, there have been rate cuts around the globe (in countries as diverse as New Zealand and Russia), and in Japan expansive monetary policy is a key tool of the current government.
Yet in economies like the US and UK, where growth has been much stronger, the expectation is for rate rises to come soon, and this has pushed up the value of the dollar and sterling against currencies like the euro. And sharp US dollar dominated moves can cause uncertain moves in other currency pairs like sterling-Australian dollar. Importantly, due to sometimes contradictory statements by central bankers and the uncertainty over the health of the global economy, the path towards rate rises has not been clear, adding even more volatility to currency markets.
So what can you do about this? There are tools available that will allow entrepreneurs and business owners to hedge their exposure to currency risk and mitigate against sharp corrections or runaway moves in currency markets. At banks like Investec, for example, it is possible to secure a solution that is tailored to the individual needs of your business and which includes the service of someone who will be able to proactively monitor markets and assist throughout the year.
Since nobody can be certain of the future, in such an uncertain market, this can be a prudent strategy.