Author: Director, International Banking Jon Macapinlac
As the coronavirus pandemic causes volatility in the stock market, the currency markets are no different and have been experiencing significant volatility. The U.S. Dollar Index has surged a staggering 7 percent since its March 9th low due to a flight to safety in the midst of global uncertainty.
Central banks have provided massive amounts of stimulus in interest rate cuts and quantitative easing. However, even with the Federal Reserve’s recent rate cut and new bond purchase program, many are seeking out liquid currency. Due to the rapid increase in the dollar, there has also been market talk of possible intervention by G-7 governments to bring it down.
In addition to COVID-19, the deterioration in crude oil pricing due to the price war between Saudi Arabia and Russia is causing global strain. With a reduction in travel and many citizens remaining at home, the demand for oil has dropped and the price war has more than halved values since a peak in January. Commodity currencies, such as the Canadian Dollar, Norwegian Krone and the Mexican Peso have seen record drops.
Reducing Your Foreign Exchange Risk
Even though the currency market is volatile, there are strategies that can be used to reduce risk. For businesses who do business internationally, managing your exposures could be a crucial component of providing cash flow certainty. Businesses may want to incorporate forward contracts, which eliminate the risk of exchange rate volatility by purchasing or selling foreign currency at a fixed rate.
To reduce risk, businesses that rely heavily on foreign-sourced goods and services may want to consider paying in local currency to take advantage of the surging dollar environment. This also makes it easier for vendors, who will then have their receivables in their own currency.
Netting strategies can also be used to reduce the conversion risk associated with a volatile market. With a mechanism to net foreign denominated cash flows, businesses that have payables and receivables in the same currency should be able to offset some if not most of their exposure. Establishing a multi-currency account may also be a good solution, as it enables companies to manage international cash flow while reducing foreign exchange conversion costs by netting both payables and receivables.
Preparing for Future Volatility
As the coronavirus pandemic continues and the global economy reacts, the risks of further USD volatility remains high. If your company does business internationally, talk to your financial institution to learn how you can implement a risk reduction strategy.
Learn how FNBO’s Global Banking team can help you reduce foreign exchange risk.
About the Author
Jon serves as Director of Global Banking Business Development for First National Bank of Omaha. Since 2011, he is charged with the enhancement and growth of the bank’s international portfolio. Jon has 20 years of experience advising a wide array of clients on strategies to mitigate international risk. He is a 1993 graduate of the University of Iowa with a BSBA in Finance.