Jaspaul Bains, Foreign Exchange Strategist, RationalFX
As the COVID-19 pandemic forces more restrictions upon our daily lives, society’s priority is to help each other stay safe. But what about the economic impact of this unprecedented global health crisis?
Thankfully, it’s not all doom and gloom for cross-border businesses. While the economic impact of the pandemic has already driven exchange rate volatility beyond the levels experienced during the 2008 financial crisis, bringing the need to manage currency market risk into sharp focus, opportunities to capitalise on favourable market movements will present themselves.
Why has COVID-19 affected currency markets?
As COVID-19 continues its march around the world, governments are closing whole commercial sectors and ordering people to stay at home to contain its spread. While necessary, this has severed supply chains, stalled economies and provided all the ingredients needed to trigger a recession.
The economic fallout has precipitated historic fiscal and monetary action from governments and central banks worldwide. Designed to help economies weather the economic storm, these emergency measures have also caused currency markets to shift like never before.
Exchange rates constantly fluctuate in response to a range of economic factors at the best of times. The unprecedented market movements the COVID-19 pandemic has set in motion will persist until its vice-like grip on economies loosens.
There’s an elite band of currencies that experience increased demand during times of economic uncertainty. Known as safe havens, they typically remain resilient because they hail from economies that tend to be strong. So, when a risk-off mood envelops currency markets – such as the one triggered by the COVID-19 pandemic – demand for these currencies swells because they offer stability in an otherwise unstable environment.
As the pandemic’s grip on the global economy started to tighten, safe-haven currencies like the Japanese yen, Swiss franc and US dollar began their upward trend. Unfortunately, there’s no such thing as a sure bet when it comes to currency markets. For example, on 20 March 2020, the US dollar achieved its biggest weekly rise since the 2008 financial crisis on the back of COVID-19 fuelled risk-aversion. Fast-forward just a week, however, and it had posted its biggest decline since 2009 as risk appetite grew.
Despite levelling off slightly since the COVID-19 crisis began, the US dollar has maintained an edge relative to most major currencies, including the euro and China’s Yuan. Spooked by uncertainty and eager for safe assets, investors and business owners are piling into the US dollar – the world’s reserve currency.
Currency risk strategy
The ongoing COVID-19 crisis has emphasised the need for businesses to adopt a proactive approach to currency risk management. Simply hoping the market will move in your favour will leave you exposed to the pandemics economic influence. In contrast, a well planned and executed currency risk strategy could mitigate the impact of currency market risk on your finances, by allowing your business to secure exchange rates now and in the future – saving you time and money.
There’s no ‘one size fits all’ approach to protecting your businesses’ finances from currency market risk, so consider working with a foreign exchange provider, such as RationalFX, to develop an FX currency strategy that’s tailored to your business’s risks and requirements.
Currency risk management tools
A currency risk strategy should be tailored to your business’s unique international payment requirements and risk appetite. To achieve this, it will combine appropriate currency products, designed to help you control the cost of your international payments.
- – Forward Contract: lock in the current market rate, so you can fix a price for your international payments for up to two years.
- – Limit Order: target an exchange rate that’s not currently available, so you can secure your desired level the moment the market reaches it.
- – Stop Loss: set a minimum exchange rate that you would want your payment to be executed at. If the rate falls and hits this minimum, the transaction will be completed ensuring you avoid a further decrease in value.
Speak to a currency expert
At RationalFX we understand that these are challenging times for businesses of all sizes with international payment requirements. That’s why we’re on hand to help you navigate these uncharted waters using our knowledge and experience.