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Tackling Exotic Currency Volatility for the Last Half of 2019

Despite what so-called experts proclaim, it’s near impossible to predict the rises and dips of foreign currency, even from the most stable countries.

Tackling Exotic Currency Volatility for the Last Half of 2019
Tackling Exotic Currency Volatility for the Last Half of 2019

Unexpected political or economic events can cause even a reliable rate to take a dive, as watchers of the British Pound will know all too well after the unexpected Brexit results were first announced. Exotic currencies, those that aren’t commonly traded, can be particularly volatile. Many of these belong to developing or emerging nations, whose economies can be less predictable and politically stable.

Still, in a variety of industries, from mining to tourism, the use of these funds may be unavoidable. If a company regularly trades within an exotic currency, they’ve likely experienced a rollercoaster of rates while handling billing with their foreign counterpart. Rather than risk cash flow with an unpredictable foreign exposure, hedging is one possible solution that help manage this gamble. A business can opt for a forward contract, which allows for a predetermined rate in their currency exchange for a set period of time. This can allow for accurate financial forecasting and helps prevent loss on transactions where the rate is unfavourable for the buyer.  Because the rate is locked in, it may also prevent the business who entered the forward contract from participating in a favorable rate shift. Consider hedging the following currencies to help avoid volatility in the remaining months for 2019 and beyond.

Mexico: Companies south of the border are vital partners for North American businesses and the peso can be less volatile than neighbouring countries. However, investors will vividly recall the sharp 6.4% one month drop in the peso’s value last summer. The currency also fell to previous record lows nearing the last U.S. presidential election. With the 2020 campaign already underway, regular traders of the peso should be mindful of these upcoming world events.  

Turkey: The summer of 2018 will also be top of mind for those who deal with the lira. The currency lost 25% of its value in a single week, spurring significant panic amongst some buyers and sellers. Rates smoothed out over the past few months, but in late March 2019 dipped again, before somewhat recovering. Still, the move brought forth worries of a 2018 repeat. A contributing factor to last year’s crash was U.S. President Trump’s surprise announcement of tariffs on metal imports. Some speculate the Turkish-American relationship will be tested again later this year if Turkish President Erdogan proceeds with his plan to purchase a Russian missile-defense, despite U.S. calls for a delay until 2020.

South Africa: This Valentine’s Day, the rand was crowned with the unfortunate title of the world’s most volatile currency. Significant blackouts by the country-owned electricity supplier have contributed to major economic ramifications for businesses and individuals. The past five years have demonstrated dizzying highs and lows against the USD, with an all-time high in January 2016, followed by an unsteady drop for the rest of the year. What transpires for the rest of 2019 is anyone’s guess.

While necessary, the use of these currencies can negatively affect the bottom line of the companies who regularly trade with them. In order to manage fluctuation, hedging at least a portion of the foreign exposure is an option fix exchange rates and preserve certainty in expenditure, regardless of currency shifts.

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