Managing foreign exchange volatility during an election cycle

Forex market volatility is driven by a variety of causes including economic indicators, interest rates, and many more. One of those factors is current geopolitical events, like the US presidential election.

In the past, elections have been correlated with forex market volatility. For instance, there was a large spike in the US dollar leading up to the 2016 election largely due to expectations of fiscal stimulus under President Donald Trump. The US Dollar Index (DXY) rose 7% in just 3 months leading up to the election. The DXY increased from 95.463 in August 2016 to 102.210 in November 2016.

While foreign exchange markets around election season aren’t always this volatile, market sentiment, changing policies, and uncertainty contribute to currency exchange rate fluctuations. Making FX transfers in a market plagued with uncertainty and volatility can be nerve wracking, luckily that’s where our OFXperts come in.

Our OFXperts know that every situation is unique and it can be stressful for businesses and individuals to make forex transfers around election times, which can create more volatility in the markets. That’s why OFX has a variety of risk management tools that have helped our clients get the most out of their FX during past election periods.

During the 2016 US presidential election between Donald Trump and Hillary Clinton, the USD/CAD pair rose leading up to the election but quickly fell following Donald Trump’s presidential win. OFXpert, Tim, helped his manufacturing client anticipate this volatility and make the most of these election-based market moves.

“We’ve helped clients navigate the volatility from presidential elections by looking at what their needs are and planning for it. Back in 2016, I had a manufacturing client in Canada that was selling goods into the US and getting paid in US dollars. We did a Forward Contract* for USD/CAD right around the time of the US election at the US$1.35 range, by the time we actually got the money in mid-December, the USD/CAD pair had fallen to about US$1.31. My client ended up making about CA$4,000 more on the CA$100,000 Forward Contract.”

It is not only US presidential elections that can impact markets worldwide though. Referendums, political decisions, and newly elected parties can have impacts on international business globally. 

In 2016, the United Kingdom voted to secede from the European Union in the monumental Brexit vote. The general population expected the vote to result in the UK remaining part of the EU, markets were shocked when the vote showed the UK withdrawing from Europe. The aftermath of the UK leaving the EU after 43 years caused turmoil in foreign exchange and global stock markets. The GBP/USD pair dropped close to 15% in the weeks after the Brexit decision. UK-based OFXpert, Harry, helped one business book Limit Orders** before the Brexit vote to hedge against possible FX volatility.

“Just before the Brexit referendum I helped a food manufacturing startup business who had recently received a US$20 million funding round, to hedge against possible market volatility around the vote.” OFXpert, Harry, assisted his client by booking Limit Orders** lower than where the GBP/USD pair was at that time, so that his client could convert their funding from USD to GBP at their desired rate. “When the UK vote to leave the EU was announced, the sterling dropped significantly against the US dollar and this client ended up saving 3% on their US$20 million transfer. This saved them US$600,000 in the process.”

Amid the 2020 US presidential election between Donald Trump and Joe Biden, the EUR/USD currency pair appreciated by around 13.28% from May 2020 to December 2020. During this time, OFXpert Fred helped to lock in his client’s currency exchange rate with a Forward Contract*. 

“I had a client who brokered large Glass Machinery from Italy to the US. This meant that EUR/USD volatility was a big problem for him because he negotiated prices in USD with the buyer, and the supplier was paid in EUR. Going into the 2020 election year it was especially important for us to supply him with risk management tools to help protect his margin.” OFXpert Fred and his client booked a Forward Contract* for each of his invoices, adding up to €2 million. This helped Fred’s client lock in his profit by securing the pre-election exchange rate for the EUR/USD pair for his invoices, without worrying about the wide EUR/USD swings during the 2020 election year. Fred saved his client around 5 figures by locking in the exchange rate prior to the election.

While forex volatility can feel unsettling, OFX has a variety of risk management tools to help clients plan ahead, protect their forex transfers, and gain peace of mind. Let’s dive deeper into some of the products mentioned above.

Forward Contracts* are a hedging tool that can help you or your business budget and plan ahead by locking-in your exchange rate for up to 12 months. This means you can fix all or even a portion of your known FX costs for the election year ahead.

Limit Orders** allow you to target an exchange rate that suits you or your business and, if it’s reached, OFX will help you get your money moving.

Currency Outlook keeps you in the loop and helps you gain valuable insights into the forex market with our monthly newsletter. Compiled by our treasury experts, this report inspects key currency shifts, global news, and political landscapes to forecast forex fluctuations.

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*If you book a Forward Contract, it may mean losing out if the market rate improves because you’re contracted to settle at the agreed rate. Read more.

**If you book a Limit Order, it may mean losing out if the market rate continues to move above your target rate. There is no guarantee that your desired rate will be reached. Once the order is triggered, the transfer is binding and cannot be cancelled.