As soon as 2019 opens for business, corporate financial officers should look out for these currency red flags
Currency volatility around the globe is stabilizing in late 2018, and that's good news for corporate financial officers who've been beset by excessive risk in the currency market during the first nine months of the year.
According to data from CreditPulse, global currency volatility declined by 1.48 percent during the third quarter – that's down from 1.67 percent in the second quarter of 2018. Geopolitical events and economic strife had steered currency risk upward in the first half of 2018, so a downward trend is welcome news for currency market participants.
The question now is, can a more stable currency market prove sustainable into 2019? In some bourses, like the U.S. and the Euroland, the answer is “yes." But in these countries, continued instability seems to be on the table heading into the new year.
The ruble is also suffering from continued U.S. sanctions against Russian companies and oligarchs, a scenario which is expected to continue into 2019.
The Indonesian rupiah remains one of the most volatile currencies along the Pacific Rim
Traders are concerned over Indonesia's current account deficit, which has widened in 2018, leading to larger swings in volatility. The rupiah's burgeoning volatility is tied to the account deficit, which rose to USD 8 billion in the second quarter of 2018, up from USD 5.7 billion. Since Indonesian bonds are largely owned by foreigners, the rupiah is highly impacted by any selloffs, which have ranged upward so far in the second half of 2018.
The Russian currency is edging toward the rupiah as the most volatile global currency in 2018
In late August, Russia's central bank suspended foreign currency purchases through the end of September, in a dramatic attempt to stabilize the ruble, after it declined to its lowest levels against the U.S. dollar since 2016. The ruble is also suffering from continued U.S. sanctions against Russian companies and oligarchs, a scenario which is expected to continue into 2019.
Somewhat steadied, the Turkish lira still faces strong economic headwinds
Volatility tied to the Turkish Lira has moderated somewhat in October and November, after Turkey's central bank triggered a series of interest rate hikes, and after the government launched its New Economic Programme initiative after the lira almost collapsed in the summer of 2018. While slivers of sunlight are indeed appearing over the lira landscape, the European Bank for Reconstruction and Development (EBRD) recently slashed its outlook for GDP growth in Turkey next year, citing depreciation of its currency and skyrocketing interest rate rises that are expected to crimp economic growth in the country. That should lead to continued pressure on the lira heading into 2019.
A name change won't fix what ails Venezuela's bolivar
History will not be kind to Venezuela and the Maduro government's inept handling of its collapsing economy, five years in the making, and its highly devalued currency in 2018. In August, events grew even more heated when the government issued a 95 percent devaluation of its currency, the bolivar. The Maduro regime also rebooted its currency, giving it a new name (the bolivar soberano, which replaces the bolivar fuerte.) The new currency, no matter what the name, can't hide the fact that about 14,600,000 bolivars is only worth USD 2.20 U.S. dollar terms – enough to buy a half-gallon of milk in the economically reeling country.
Once, the world's most volatile currency, the future of Argentina's peso remains mixed
The Argentinian peso was, along with the Venezuelan bolivar, the world's most volatile currency in the second quarter of 2018. Although the peso has rallied as the country tries to contain a highly unstable economy, the outlook is murky for the currency. To cope with the crisis, Argentina's central bank hiked interest rates by 6 percent in late August, and negotiated a USD 50 billion loan agreement with the International Monetary Fund two months earlier (that eventually grew to USD 57 billion.) Additionally, inflation stood at 31 percent in Argentina in the third quarter of 2018, effectively boosting interest rates in the South American country to 30 percent. Even as the peso strengthened in early October, economists expect the Argentinian currency to remain unstable for the rest of the year.
Misery loves company: more currencies to watch
The above five global currencies are hardly the only ones navigating choppy waters in 2018. Iran's rial, the Syrian pound, Liberia's dollar, and even the venerable British pound are also running in high volatility mode as 2018 draws to a close.
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DW (August 23, 2018) Troubled times for the Rubel
Oanda (September 9, 2018) 3 of the Worst Currency Devaluations in History (and 1 to Watch for Today)
The European Bank for Reconstruction and Development (November 1, 2018) EBRD cuts Turkish forecasts on back of recent lira volatility