NEW SERIES: Managing FX Challenges in the Age of Central Bank Activism

Image of Central Bank rates

Now more than ever, central banks are actively using policy tools to manage their nations’ economic fortunes. Our new series looks at how policies and regulations across a number of world regions could impact some popular currencies in coming months—and how accountants, treasurers, and financial professionals can make sense of it all. 

In recent years, central banks around the world have dominated the headlines in an unprecedented way, and with more frequency than ever before. From the Swiss National Bank event at the beginning of 2015 - and subsequent “flash-crash”- to the Chinese Yuan devaluation in 2016, central banks are undoubtedly playing much more aggressively on the global chessboard.

On top of this, macroeconomic and geopolitical events such as oil’s recent volatility or the numerous chapters of the Brexit saga, are also having a deep impact on the foreign exchange market, resulting in periods of volatility and currency rate fluctuations.

For the corporate financial personnel whose job it is to keep track of currency movements—especially for accountants—the increased FX turbulence resulting from increased central bank activism presents a number of challenges.

For one thing, reliable data on a particular currency can be hard to come by if the underlying exchange rate is always in flux. The state of a company’s financial position—from cash flows to liabilities and hard assets—depend on accountants’ ability to retrieve a credible value for a given currency pair when needed. Fortunately, technology has evolved to the point where exchange rate APIs can be integrated directly into a firms’ ERP systems and financial management platforms—meaning rates data is available at accountants’ fingertips, via an automated data feed.

The more pressing challenge is the source. Even where rates data is readily available, there are two competing exchange rates that accountants must choose from: market rates--based on natural supply and demand--and central bank rates—“official” values used among central banks and for certain kinds of financial reporting. Regardless of which rate is most appropriate for the situation, the fact that there is even a choice shows how central banks are taking a more active role in driving the value of their currencies as well as crafting regulatory policies.

In coming weeks, we will examine some of the world’s most actively traded currencies whose future is most uncertain given local circumstances—be they economic, geopolitical or market-driven. We will discuss best practices for accountants who handle these currencies regarding Central Bank regulations.

One thing is for certain: It is safe to say that the new normal in the foreign exchange industry is dominated by uncertainty and changing volatility, and that all actors involved are looking more closely at the economic calendar, especially when central banks meetings are on the schedule.