Amid FX Volatility, Preparation Is The Best Bet

Currencies have been rocked by global volatility in recent months and years, and as Treasury & Risk noted in its latest mid-year FX market volatility report, “compared with what is to come … the past two years may end up looking like a starter course.”

Against that less-than-sanguine outlook, corporate chief executive officers and various financial firms across enterprises have scrambled to make sense of, and adapt to, volatility across currency markets tied to global macro-events. Many of those events have played out on world stages with an element of surprise. One of the most glaring examples here can be traced to the June 2016 Brexit vote.

More recently, volatility has worked in tandem with investor fears over just when and if interest rates will rise, in the United States and elsewhere. For Europe, said the site, the transition toward life without the U.K. will be a tough one — and not a short one. The specter remains that other nations will follow suit and opt to exit the eurozone, crumbling what seems to be an already somewhat weakened currency foundation. Treasury & Risk also noted that the twin impacts of currency swings and volatility in commodities prices can have outsized effects on certain industries. One glaring example is the energy industry, where oil prices crashed and where rubles and dollars can add “knock-on” effects as those currencies gyrate, too, leading many firms to curb capital spending.

Another sector that can be buffeted about by extreme currency moves is the travel industry, which Treasury & Risk said could be seen to have had strong growth and an attendant buildup in cash and other liquid assets (held across multiple currency zones), making it sensitive to swings, too.

The site noted that companies and their treasury teams should explore natural hedges and also options contracts as strategies worth employing in order to combat volatility. Exchange rates should be checked daily, as well as treasurers knowing where their data feeds originate and how accurate those feeds may be.