Following the Federal Reserve’s latest move to hold interest rates steady, Natasha Lala of OANDA explains the potential impact the decision could have on FX rates for corporate treasurers.
Volatility has very much been the buzz word since the beginning of the year. From falling oil prices to inflation and ongoing troubles in China, it’s fair to say that corporate treasurers have had plenty to think about. These uncertainties contributed to this week’s decision by the US Federal Reserve to keep rates unchanged, at least until the world economic picture becomes a bit clearer.
Does this more conservative policy decision by the Fed (a notable shift from December when it raised rates by 25 basis points) mean that we can expect global exchange rates to also remain steady?
Unfortunately, that’s very unlikely. For one thing, currency markets tend to take a global view on interest rate policies, and the US is just one part of that puzzle. In fact, the market is likely to have a stronger reaction to what the Bank of Japan decides this week with regards to its own interest rates. What drives market movements is not so much the actions of one country’s central bank, so much as the collective effect of interest rate policies on a global level. And right now, central banks are less interested in cooperating than they are in adjusting their monetary policies to guide their own economies in an era where long-term growth is far from certain.
On top of pending decisions from other central banks on rates, falling commodity prices will also continue to exacerbate the volatility situation in the months ahead. With the price of oil now cheaper than the barrel it comes in, once-booming, oil-driven economies like Russia have begun to see their growth erode, and with it the value of their currencies. So what does this all mean for corporate treasury personnel?
While companies are unlikely to have their FX rates dramatically hit by the Fed’s move this week, there are other factors they should consider. Beyond the potential impact on corporate revenue, currency volatility from other parts of the world compromises the integrity of foreign exchange (FX) rates that treasury professionals rely on for accounting, forecasting, and reconciling balance sheets. The accuracy of these rates is already challenged by the over-the-counter nature of FX trades; rate providers offer data based on their own estimates, not on what’s actually happening in the wider marketplace. Volatility further increases the likelihood that rates will be obsolete by the time they hit the treasurer’s desk.
Granted--corporate treasurers, CFOs and financial controllers are not reacting to the Fed’s every move to the extent that traders are. Still, as overseers of the firm’s cash and other assets, corporate treasury personnel are very much “portfolio” managers. As such they should keep a vigilant eye on the many short-term market events that have the potential to move exchange rates—be they central bank decisions or other economic data. After all, this latest decision doesn’t mean the Fed will not raise rates later in the year.