5 commonly asked questions about currency volatility answered by the experts
Our currency experts at OFX get asked a lot of questions throughout the day about how businesses can protect themselves and make the most of their currency trades, alongside pretty much everything else you can imagine in relation to currencies.
1: Is there an end in sight to Brexit and how do I protect my business?
We have certainly seen the bottom, in my opinion, of the pound when it went to US$1.19 on September 3 as a result of fears over a no deal Brexit, although if the Prime Minister now broke the law by opting for a no deal, we could see the pound fall to parity with the euro. The October 31 deadline for the UK leaving the EU looks like it is going to be skipped and the date could now be pushed into the new year.
However, Jean-Claude Juncker came out with some warming comments about progress towards a deal on September 20, and the pound jumped on the news.
Clients are interested to know what can happen, and our job is about talking about risk management and what to do in a worst-case scenario, and what that could be. So, businesses can put two plans in place. They can put plans in place accordingly to protect their exposure against the worst-case outcome, and then against the most likely outcome.
- Hamish Muress, OFX UK
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2: Who is the trade war more damaging for – China or the USA?
The reality remains: no-one wins from an ongoing trade debate. Ultimately businesses, governments, consumers and entire economies will suffer. The difficulty at present is that it’s challenging to ascertain specifically where the most pain is being felt as economic indicators are mixed.
In the short-term however, China has a proven ability of diversifying it’s portfolio of trade partners, finding destinations throughout Europe for the goods it produces at mass.
The US President can ill-afford trade lead economic weakness as history shows a soft economy will not be kind to those looking to win in a campaign year.
In reality, both have something to lose but perhaps not as much as the wider economies, both Australia and New Zealand run the risk of being caught in the cross-fire between two of the world’s super-powers.
- Michael Judge, OFX Australia
3: Why does the US dollar continue to strengthen even though most global economic disruption is caused by President Trump’s policies?
When it comes to trading currencies, about 90% of all trades made worldwide are made against the US dollar. So, with the exception of the yen and the Swiss franc, which are also safe haven currencies, you will see the US dollar strengthen against all other currencies when things are not going well. In fact, it has most impact on emerging market currencies and commodity currencies, such as the Australian dollar, the New Zealand dollar and the Canadian dollar.
If the whole world was in a neutral or interest rate hiking cycle, then the US dollar would go down. But the Bank of England is not shifting its policy, the Reserve Bank of Australia and the Reserve Bank of New Zealand are likely to ease their interest rate stance, and the European Central Bank already has. The Bank of Canada is neutral, and even though the Federal Reserve has cut rates, it all means the US dollar is still holding up.
- Jake Trask, OFX UK
4: Will the Australian dollar get stronger?
The health of the Australian dollar will continue to be contingent on the outcomes of the trade-debate. It is going to do well, along with the New Zealand dollar, when things are more stable.
But there has been widespread economic disruption for a year, even though there have been a few signs of volume coming back.
With a solution to the trade war being found, we could well be having a very different conversation as that will have a big impact on the value of the Australian dollar and we would expect to see it rise. But currently, we have this see-saw effect, and in the background to that there is also Brexit.
The sentiment in the markets, and the macro piece, has an interesting dynamic. Interest rates are at 1% and quantitative easing is rising globally again. But locally for whatever reason, everyone is missing inflation targets, and that is why we are in a low interest rate environment, which drags currency, including the Australian dollar, down.
But a positive impact on global sentiment with signs that trade concerns will abate, is expected to bode well for the Australian dollar and New Zealand dollar currencies.
- Michael Judge, OFX Australia
5: Japan has two major sporting events in two years – the Rugby World Cup and the Olympics in 2020. What impact will this have on the yen and Japan’s economy?
Japan hosting two major sporting events should have a significant effect on its economy. If you look back to the London 2012 games, there was a big boost for Britain that same year. The Olympics is around five times the size of the World Cup, as there are 20 nations competing now, but as many as 150 will compete at the Olympics, across many more sports.
Both should mean rises for the yen as Japanese spending increases, helped by the increase in tourism and the potential investment the country will receive thanks to the world’s focus because of the two major events.
However, the safe-haven status of the yen is still more likely to affect the way it behaves, especially if the current levels of uncertainty with the US-China trade war, rising tensions with Iran and Brexit continue.
- Hamish Muress, OFX London
If you have a question related to your business or anything else that you would like to know about currencies and markets, then our experts are happy to answer them for you. Get in touch here to learn more from the experts.
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