29/05/2020

Managing currency market risk in uncertain times


Unprecedented events certainly haven’t been in short supply so far in 2020. Forget the political jousting that defined 2019 and eventually saw Boris Johnson achieve a landslide election victory – after all, general elections haven’t exactly been in short supply in recent times. This year has seen the UK – and the world – thrust into the unknown by two unique events: Brexit, which was on the horizon for some time; and the Covid-19 pandemic, which escalated into a global health crisis in a matter of weeks.

The phrase out of the frying pan into the fire springs to mind for the pound this year. No sooner had Brexit finally happened, Covid-19 swept across the globe, driving currency market volatility beyond the levels experienced during the 2008 financial crisis.

Brexit

Britain’s departure from the EU on 31 January this year – making it the first country to leave the political and economic union – certainly wasn’t the start of the Brexit saga, nor is it the end of it.

The onset of political and economic uncertainty that followed the UK’s decision to leave the EU has shown little sign of abating since the 2016 referendum. As the Brexit process rumbled on from one deadline to the next, the pound came under significant pressure for a prolonged period.

Talking of deadlines; when Brexit finally became official back in January, the UK immediately entered an 11-month transition period until 31 December – the date by which UK government and EU officials must agree their future relationship on key issues like trade.

The government can request an extension to this deadline, provided they do so before 1 July. However, it has repeatedly made it clear its intention to get the job done by the end of the year. This bold move is seen as an attempt to force the EU into agreeing a comprehensive free trade deal within the transition period, leading to a fresh bout of political uncertainty for the pound.

Key events remaining in the current transition period:

  • June – EU-UK summit, during which both sides will have to decide whether they can finalise their new trade relationship by the end of 2020.
  • 26 November – the last possible moment for the EU to sign off on an agreement if the transition period is to end by 2020.
  • 31 December – end of the transition period.

Covid-19

The draconian measures required to control the rapid spread of Covid-19 – including travel and lockdown restrictions – have stalled economies, increased unemployment levels, and left many countries on the verge of a recession. This sudden economic shock has also caused currency markets to shift like never before; as has the emergency fiscal action taken by governments and central banks worldwide, in a bid to help economies weather the storm.

News of any further fiscal measures in the UK, US and Eurozone will be announced following upcoming central bank meetings:

  • Bank of England – 18th June
  • US Federal Reserve – 1st July
  • European Central Bank – 4th June

Managing currency market risk

Exchange rate fluctuations impact the cost of making international payments for businesses that operate across international borders. Those that neglect their exposure to this currency market risk are left counting the cost of transferring money overseas, which puts unnecessary pressure on margins and prices. Corporate and SME decision-makers must, therefore, recognise the importance of managing this Brexit and Covid-19-fuelled risk, now and in the future.

There’s no ‘one size fits all’ solution for preventing unpredictable exchange rate fluctuations from denting your business’s finances. You should work in partnership with a currency specialist to develop a bespoke FX hedging strategy that considers your market expectations and risk appetite in the context of your requirements. Your strategy will combine appropriate currency products that are designed to help you manage the cost of your international payments by mitigating currency risk.

Forward contract – allows you to lock in the current market rate, so you can fix a price for your international payments for up to two years.

Limit order – allows you to target an exchange rate that’s not currently available, so you can secure your desired level the moment the market reaches it.

Stop-loss order – gives you the option to set a minimum exchange rate that you would want your payment to be executed at. If the rate falls to this level, the transaction will be executed automatically so you avoid a further decrease in value.

A one-cancels-the-other order (OCO) is a common FX hedging strategy that enables cross-border businesses to combine two or more orders, with the condition that if one order executes, then the other order is automatically cancelled. For example, a business might choose to set an upper limit order and a lower stop-loss order at which they want a specified amount of currency to be sold at. If one is triggered, the other is cancelled, and the trade is free to be executed at the pre-set level.

RationalFX

Your dedicated account manager will work in partnership with you to develop a bespoke currency strategy that considers your business’s risks and requirements. From accurate insight into the rapidly changing economic landscape to assistance deploying agile solutions that guard your payments against unexpected rate fluctuations, we can help you stay in control of your international payments.

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Why choose RationalFX?

Based in the heart of London’s financial district Canary Wharf, RationalFX has traded over $10billion in currencies across the globe. Take advantage of our competitive exchange rates, market expertise, suite of FX products and online payment platform when you make bank to bank transfers in over 50 currencies worldwide.

Whatever your reason for making overseas payments, we’re confident our currency specialists can save you time and money while providing peace of mind. Call our team now on: +44 20 7220 8181