Is a financial crisis ever unprecedented?
Global catastrophes are more common than we remember
The global economy becomes more intricately entwined every year as technology progresses and we move into faster production processes, slicker communications and improved means of delivering the benefits and changes we need for businesses to be successful.
In fact, the world economy is so interconnected now that one event affecting a major player on the global stage will have an automatic knock-on effect on others. For example, the US-China trade war hit both the Australian dollar and New Zealand dollar hard because of their reliance on the health of the Chinese economy – their biggest trading partner.
The latest major event is the COVID-19 pandemic which has forced countries worldwide into lockdown as they struggle to contain the virus. This simultaneously prompted governments to prop up businesses and employee wages as they also had to shut down. There is widespread consensus that the resulting global recession has the potential to be like nothing we have ever witnessed.
However, when we have seen similar ‘black swan’ events before – so called because of their apparent rarity – similar statements have been made. Over time, we forget how bad things were and the danger is that important lessons that should have been learned are too easily forgotten.
When you look back, there are more of these events than you first suspect, and they are happening with some regularity. The timeline below shows each of the major events that have impacted the world economy and a related loss in the currency markets.
While each of the financial crises on the timeline were caused by a different catalyst, there are similarities in each period that can allow us to anticipate the kind of problems we will face at the next global wealth crisis. For example, the experience of the last global recession suggests that the mental health impact on those losing jobs will last much longer than the crisis itself1.
The lessons from previous crises are not always clear, and even if one recession looks very much like another, the length and depth of each recession is what sets them apart2. Recovery will come in a variety of ways, largely based on how they originated. But the longer they last, the harder it is for businesses and individuals to come out the other side unscathed.
In any downturn, you sometimes need help to see where the opportunities are. The best thing you can do in a crisis is keep abreast of developments, talk to experts – your accountant, your lawyer, your foreign exchange provider – to be sure you take all the opportunities as and when they present themselves to carry yourself and your business forwards to a brighter future.
Ask an OFXpert
We asked one of our OFXperts, Alex Hartley what his tips were in this environment. Learn more about his top 3:
1. Consider the transfer needs of your business
Let’s say you own an Australian business that needs to buy materials from the US worth US$100,000 each month and you want to limit the amount of risk you are taking in the current climate. Using the April 15 rate for Australian dollar to US dollar of US$0.6319, it would cost you AUD$158,252.89 per month at this rate.
2. Evaluate your profit scenarios
- Does the rate allow you to achieve a ‘Good’ profit margin?
If the current rates allow you to achieve a sufficient profit margin on your currency move, let’s say 10%, then locking in that rate for at least three months with a Forward Exchange Contract while the opportunity is there could be the best move for your business.
- Does the rate allow you to achieve an ‘Acceptable’ profit margin?
If at the current rate you can only achieve a 5% margin but ideally you want 10%, then consider using a Forward Exchange Contract for between 40-60% of the amount you need to transfer each month. The level will depend on the risk you can take with the remaining amount due. The less flexibility you have to lose money, the more you need to protect. For the remainder, you can consider targeting a rate with a Limit Order which could help bring your profit margin back up.
- Does the rate give you ‘No’ profit margin?
If you are just breaking even at the current market rates for the transfers you need to make, then you should again look at fixing that rate for the next three months with a Forward Exchange Contract. This may sound counter-intuitive as you may prefer to take the risk on increasing your profit. But that also involves taking the risk of exchange rates turning against you.
3. Reassess your position
For all of these scenarios, you should reassess your position after three months as we should have a clearer picture of where we are in terms of the pandemic and how much longer it will affect the global economy and your global money transfers.
Download the OFX Currency Outlook
Learn more in the latest edition of the OFX Currency Outlook. It’s been produced to help you navigate market movements today, and to understand what to watch out for in the coming months.