Covering the spread: A look back at the year’s most challenging currency pairs

Global Currencies

In the final part of our ‘Covering the Spread’ blog series, we recap how widening spreads with the dollar have affected treasury specialists across the globe.    

A perfect storm of geopolitical events has seen the US dollar soar, and the spreads fluctuate against a basket of major world currencies. From protectionist policies and bubbling trade wars to hotly-anticipated European elections and the shock of Brexit – the last 12 months have not been short of forex-rocking events. For multinational companies handling dollar-based corporate payments, it’s been a tricky situation.

With this in mind, here is a recap of the most volatile currency pairs we examined:
 

Dollar/Peso

Relations between the U.S. and Mexico are shaky at best. Trump’s commitment to a border wall, funded by a potential 20 per cent import duty, has tensions flared. While NAFTA, the centerpiece of commerce among the US, Mexico and Canada might not last much longer if Trump has his way. With relations on a knife edge, the spread between the dollar and the peso has been volatile. The dollar initially rose to record highs against the peso, but the peso has since rallied as the prospect of a weaker dollar drives confidence. While Trump hasn’t quite devastated the peso as expected, volatile spreads will continue to vex those overseeing cash flows to and from the country.

Read full article on Peso here.
 

Dollar/Pound

Following the UK’s decision to leave the EU, the pound fell to historic lows – and it’s been a bumpy ride ever since. While it no longer lingers at the lows it hit back in June 2016, the pound has failed to regain the strength it boasted prior to the EU referendum, and it currently hangs on a thread. In fact, the pound continues to react to every speech and decision – Article 50 being triggered or whispers of a US bilateral trade deal.  There are still two years of Brexit negotiations before Britain officially leaves the EU – and a vast plain of uncertainty ahead once it does. All of which presents a long-term accounting/forecasting headache for firms importing and exporting between the two countries.

Read full Sterling article here.
 

Dollar/Euro

In the last year, the US and the EU have taken two entirely different approaches to their monetary policy. While the Fed opted for rate rises, the European Central Bank (ECB) continued with its Quantitative Easing (QE) bond buying binge, which led to the dollar surging against the euro. A laundry list of European elections added another spanner to the works. Decisive elections in France, Holland and Germany spooked investors – and the French election still does. The euro has witnessed a surge, due largely to the fact that the French elections look set to swing towards the centralist candidate, as opposed to populist Le Pen, but the polls have been wrong before and the euro isn’t out of the woods yet.  

Read full ECB vs. Fed article here.
 

Dollar/Ruble

The US and Russia have a history of frosty relations, but, with Donald Trump in the Whitehouse, the relationship is definitely beginning to thaw. In fact, the reformed relationship had a direct impact on the performance of the ruble against the dollar, with the ruble closing 2016 as the world’s best performing currency. However, the current situation can’t be guaranteed in the long term. Both presidents are unpredictable, and the media spotlight looms large on Russia’s ties to the US. The relationship could falter at the drop of a hat and corporate treasurers with interests in both the ruble and the dollar need to be wary of such an eventuality.

Read full article on Ruble here.
 

Dollar/Rupee

It has been a volatile year for India and its currency. Even as two high-value banknotes were removed from circulation, the Reserve Bank of India opted to maintain current interest rates to ease market volatility – reaping havoc in the process. Despite these developments, India continues to be one of the world’s economic bright spots, one that so far hasn’t fallen foul of president Trump, and its currency has remained largely strong against the dollar. India is fast becoming a go-to business center for multinational companies of all sizes. Most firms are now likely to have cash flows involving the rupee. For treasurers, it’s a time to make the most of India’s exciting growth trajectory.

Read full Rupee article here.
 

Dollar/Loonie

The Canadian economy is experiencing a boom period. Just this month, the Canadian dollar made significant ground on the US dollar on news that Canadian retail sales comfortably beat expectations. The first quarter of 2017 is expected to see GDP rise by an impressive three per cent. Canada has benefited from a cheap loonie, but with positive economic prospects how long will that remain? Especially as the US dollar begins to slow. The recent spread has been somewhat of a boon operationally for treasurers, but the spread is now closing and finance teams will have to adjust accordingly.

Read full article on Loonie here.
 

So how can CFOs and corporate treasury departments manage their exposure to the above currency spreads as 2017 continues?

First, across all currency pairs, treasurers need to prioritize one thing: data. Given exchange rates’ volatility over the past few years, it’s crucial that corporate financial departments have the necessary forecasting and market monitoring tools, embedded within their financial management platforms. Automated data feeds can give both real-time and historical FX data – and with geopolitical events causing wild currency swings from one day to the next, high-speed data analytics systems are central to managing FX exposure. Alongside this, corporates executing payments across any currency pair involving the dollar need to assess their payment provider. As spreads widen, or tighten, and volatility continues, finance teams need a payments partner that can offer a competitive solution.

There’s no rest for a treasurer as 2017 looks set to be another eventful year – but armed with the right data, the right partners and a finger on the pulse of world news, it doesn’t have to be a painful one.