FX in the Age of Central Bank Activism: What have we Learned?

World Currencies

FX in the Age of Central Bank Activism: What have we learned?

We take a look back at this blog series that tackles the increasing role of Central Banks and what challenges treasurers, CFOs, and financial professionals might face.

We explored the growing influence of Central Bank monetary policy-making on corporates. From the threat of rate disparity across the UK and EU, to plans for Central Bank adoption of cryptocurrencies in South Africa, it is fair to say that there is no shortage of events that treasurers and CFOs need to be aware of.

Here is a breakdown of the issues we delved into, with some industry insight on how recent Central Bank activism may impact corporate decision-making in the future.  

Can corporates gain from China’s lead role in the Central Banking soap opera?

China’s Central Bank has been paving the way by implementing new monetary guidelines. As such, the yuan strengthened against the dollar. However, not is all as it seems: in this modern central banking dilemma, businesses exposed to both the euro and the yuan will face challenges, as the European Central Bank (ECB) contrastingly publish their rates based on recommendations determined on benchmark-setting processes from ESMA. CFOs and treasurers will need to up their game as we enter a more complex Central Banking climate with monetary policy stances, which, in turn, generate greater potential risks.

Read full article here.

The EU and the UK at a crossroads

As the EU pursues a monetary policy aiming to stimulate growth, the Bank of England contrastingly looks to foster an environment of stability amid Brexit uncertainty. Back in July, we alluded to an impending hike in interest rates in the UK. The financial landscape is constantly evolving, and given Mark Carney’s hint just two weeks ago, a rise in interest rates - for the first time in a decade - could be imminent. Although Carney remarked that any rate rises would be at 'a gradual pace and to a limited extent’ in order to bring inflation back towards the BoE’s two per cent target, in the future we could see a global trend as Central Banks move towards higher interest rates. ECB and BoE rates should be used in financial reporting, but to understand a firm’s risk, price actual cross-border transactions a true market price is required. For global corporates, an automated source that provides both sets of rates is best.

Read full article here.

A Grain of Salt with Fed and BoC Announcements

Many corporates hang their decisions off any monetary policy snippets emanating from Central Banks, and with a third-rate hike since last December from the Fed, coupled with the Bank of Canada’s first rate rise in seven years, businesses are heavily exposed to the dollar and loonie. Recent rises could pose a problem because the data supplied by both banking behemoths is only for reference, and not supposed to be used when evaluating transactions or market risk. Of course, the recent rate hikes should certainly be reflected in any corporates financial reporting - so how can corporates take the rate hikes into account while managing their risk exposure in lieu of these recent changes?

Read full article here.

The Crypto Conundrum: Planning for Central Bank adoption of Digital Currency

South Africa’s indecision towards the adoption of bitcoin has incited a global discussion about how cryptocurrencies are to fit in with monetary policy in the future. Generally, we can see a divided approach among Central Banks towards accepting new technology, with China banning ICOs and the Dutch creating an internal coin for experimental use within its Central Bank. However, while cryptocurrencies have wide appeal with technology trading experts, their acceptance into the mainstream and recognition by Central Banks remains a matter of controversy and, ultimately, time.

Read full article here.

Playing your cards right in the face of conflicting Monetary Policy in India and Australia

Although faced with similar problems, namely weak inflation, employment and economic growth, Central Banks in India and Australia demonstrate opposing strategies in attempt to tackle these issues. Whilst the Reserve Bank of India (RBI) chose to cut interest rates to an all-time low since 2010, the Reserve Bank of Australia (RBA) opted to weather the storm by keeping interest rates consistent for a full year. Ultimately, corporates engaging with this region need to be prepared for rate disparity across the two currencies.

Read full article here.

Latin America’s Tug of War: Central Bank determination versus Political upheaval

In the face of political turbulence, Central Banks in Latin America are being forced to return to the drawing board: surprise events have undercut the efficacy of rate changes, dampened growth strategies and sent currencies swinging in directions that belie economic data. With drastic rate cuts by the Central Bank of Brazil and the volatile status of the Peso, the need for automated exchange rate feeds and greater pools of currency rate data has never been more vital for treasurers and CFOs.

Read full article here.

In summary…

In recent years the normalization of Central Bank monetary policy has kept market volatility relatively low. However, the FX landscape is changing: unexpected macroeconomic and geopolitical events, combined with new technologies, means uncertainty is rife. Traditionally seen as a bridge to be crossed when necessary rather than a pre-emptive measurement, risk culture now needs to be embedded within the very fabric of corporates identity, to become a buzzword in the market space and be at the forefront of day-to-day decision making by treasurers, CFOs and shareholders alike.

It is safe to say that the new normal in the FX industry is unpredictability, and all those affected should keep an increasingly watchful eye on the economic calendar, especially when Central Banks’ meetings are on the agenda.