Currencies’ Wild Ride is Not Over: What we learned in Q1 2016

Currencies to watch in 2016

For many of the world’s key currencies, 2016 began on shaky ground. With Q1 behind us, Natasha Lala of OANDA Solutions for Business looks at what corporate treasurers can expect in the months ahead.

 

One of the most important topics that corporate treasury professionals faced as they stepped into 2016 was instability in many of the world’s most vital currencies. 2015 saw volatility creep back into forex markets, and so far this year has been no different. Turmoil in the marketplace--compounded by falling commodity prices, rate decisions from central banks and ongoing political uncertainty—continues to vex companies trying to minimize their multi-currency risks.  And because these risks have been more pronounced as of late, corporate treasurers, CFOs and controllers are finding themselves keeping a much closer eye on their FX data feeds than normally might be the case.

 

To re-cap where we’ve been and where the market might be headed, here is a look back at this year’s currency activity, along with some key takeaways:

 

·       Chinese Yuan – A combination of government devaluations, erratic equity markets and decreased prices in commodities contributed to the weakening of the Chinese yuan, leaving many investors with a major headache. Efforts to stabilize the currency haven’t provided much change, in spite of the International Monetary Fund positioning the yuan as a select global currency next to the dollar, sterling and the euro. To make matters worse, slow-moving industrial growth continued to hurt companies in the area of exporting crude oil, aluminum and platinum.

·       Brazilian Real – Devaluation and low demand for commodity exports have only exacerbated the country’s economic woes in light of a stubborn recession and stringent austerity measures. Even with these difficulties, many major corporations find themselves unable to pare down their Brazilian operations very much, in spite of a rise of domestic goods consumption. The country’s economic fortunes make for a difficult read for financial executives to make sense of.

·       Turkish Lira – Economic prospects at the tail-end 2015 positioned Turkey for a brighter new year. However, the Lira found itself on the other side of the coin with increased tension with Russia and a stray Russian fighter jet being bought down on the edge of Syria. Both untimely events sent the Lira into free fall as panicked investors sold the currency at the prospect of conflict.

·       Russian Ruble – A currency that is tied closely to the country’s position as one of the world’s largest exporters of crude oil, the ruble has seen better days—thanks to the steep drop in oil prices. Add in the country’s unsteady geopolitical situation relative to the West and its problematic involvement in Syria, and one can understand why the ruble is likely to see continued stop-and-go action for the remainder of 2016.

 

In light of other worldwide uncertainties, volatility is not expected to ease for the rest of 2016. But what does this shaky movement mean for CFOs and treasurers as they look ahead toward the rest of the year? For one thing, corporates will have to plan carefully, thoroughly assessing their operations and determining whether it is possible to create natural hedges in the face of sudden currency activities and events. Companies will also need to learn how to manage the volatility itself. Because of the unpredictable and volatile nature of currency markets, corporates will need to have a strategy in place to deal with the wild market swings that have become the norm in recent months.

 

One of the best ways to do this is to have access to the most accurate and up to date information about FX rates. As treasury professionals aren’t traders, they aren’t usually expected to take immediate action from news and developments of the day. They are, however, asset managers in that they oversee a portfolio of cash, collateral and other liquid assets   As such, they need to be well aware of short-term market movements and any events that could move the needle when it comes to exchange rates. This can include having access to advanced technologies integrated directly into their practices, including real-time data feeds for FX rates and related analytical tools. By having appropriate technologies in place, corporates can better understand what’s going on with the market at any given moment, allowing them to respond in an appropriate and timely way.

 

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