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The impact of market volatility

Are currency fluctuations keeping you up at night?

Are currency fluctuations keeping you up at night?
Are currency fluctuations keeping you up at night?

Western Union Business Solutions clients entered 2020 with expectations of the relatively calm currency markets they had witnessed in previous years. The Canadian dollar traded in a eight-cent range versus its American counterpart in 2018 and a four-cent range in 2019. And the variability within those trading ranges was minimal. Many clients gained a false sense of tranquility and were caught off guard by market disruptions at the onset of the COVID-19 pandemic. The US dollar strengthened significantly in March 2020 against currencies around the world – including the Canadian dollar – amid a sharp sell-off in equity markets and flight-to-quality into US Treasury bonds. The Canadian dollar suffered as well from depressed oil prices given lockdowns and a decline in global trade.

The global policy response to the pandemic was swift and unprecedented. Central banks cut interest rates and initiated asset purchase programs to promote orderly markets. Fiscal authorities rolled out stimulus packages, including direct payments to and increased benefits for individuals and businesses affected by lockdowns. The Federal Reserve flooded the global financial system with US dollar liquidity via central bank swap lines. These measures led to a sharp reversal in the value of the US dollar, catching many clients off guard once again by market forces outside of their control.

The whipsaw nature of currencies in 2020 led to panic-driven activity by traders on both sides of the market. Canadian importers chased the US dollar higher out of fear of missing out. Exporters held off conversions in hope for better pricing, only to regret not having locked in hedges at attractive levels. During recent account reviews, clients have commented on the market volatility in 2020 and the unfortunate variability that fed into their bottom lines. What’s more, this currency risk came at a time when many business were struggling with a decline in demand and increased supply chain costs. As part of these discussions Western Union Business Solutions reinforced the benefits of adopting a foreign exchange hedging program. Such programs are grounded in proven risk management principals and provide various advantages:

  • Disciplined, systematic approach in the face of fluctuating currency markets
  • Reduced volatility by dollar-cost-averaging hedges over time into a blended rate
  • Flexibility to respond to changes in forecasted cash flows

Western Union Business Solutions hedging specialists recently completed a risk management study for the period 2017-2020. The blended exchange rate achieved from the layered US-Canadian dollar hedging program which was studied dramatically smoothed out the peaks and valleys in the market and resulted in a 67% reduction in the risk of foreign exchange rate fluctuations.

Ask yourself: Would your bottom line benefit from reduced foreign exchange variability? Are currency fluctuations keeping you up at night? Would you prefer instead to focus on your clients and your core business? The answer for many companies is yes. And is the reason why they turn to Western Union Business Solutions for their foreign exchange.

Through a consultative approach, devoted relationship managers and corporate risk specialists help clients to design currency hedging programs specifically tailored to their needs. Focus is first and foremost on understanding a client’s business and identifying exposures. Second is the formulation of a flexible strategy to limit risk throughout the cash flow cycle. Lastly comes client education on the full complement of solutions catering to the need for protection and the desire for participation in currency movements.