Why Does Currency Fluctuate?
If you’ve ever been wondering how to prepare for currency fluctuations and how it affects trade, then please keep reading on.
The price of currency fluctuate due to the ever changing supply and demand in foreign exchange markets. There are people, companies, governments and speculators making trades in FX market every milli-second.
In addition to the daily trading, there is another important factor – the interest rate set by central banks. If the interest rate increases, the value of the currency also increase.
This happens due to the international investors selling the cross currency to buy currency with higher interest rates. The investors are piling up the debt instruments that are going to offer higher interest rate. This buying in a currency will increase the demand and price will appreciate.
Another important factor is politics and overall strength of a country. If international players assume that a political system of a certain country is stable and economy is thriving that might support the price of it’s currency.
How Can Currency Fluctuation Affect International Trade?
The currency fluctuation can impact the international trade both ways. Usually, when interest rates go down, businesses can borrow cheaper. Moreover, the currency then depreciates and makes the price of exported goods lower. So the economy is stimulated and activity increase. This is called monetary policy.
However, there is the opposite. When currency price appreciate, the exported goods become more expensive and thus the economic activity slows down.
To sum up, it is important to watch the general trend in interest rates set by central banks. This is the main driver for currency fluctuations in the long term. Also important to observe political environment too. Significant changes in the politics often trigger currency fluctuations.
How To Prepare For Currency Fluctuations?
Have you ever wondered about the timing when making payments internationally or looking to exchange foreign currency to base currency? FX market is hard to predict and some events can trigger significant currency fluctuations that can affect your business materially.
You should admit the fact of volatile FX market and adjust accordingly so it makes sense to transact globally or exchange domestically. Here are few tips that might help you to navigate those currency fluctuations:
Set your profile.
First of all, you should set your own profile in order to decide on action plan.
Questions to answer for yourself:
- Are you time or price sensitive? Do you have a target date by which the money should be received/sent in foreign currency?
- What is your risk tolerance?
- How often do you transact in foreign currency?
- What is the worst rate your business is prepared to exchange at?
- What is more important – to complete a transfer quickly or get a better exchange rate?
These question will help you to understand yourself better and have a clear goal.
Set a goal.
Having a clear goal will help you to identify the right action plan and increase your confidence.
You will be able to look up a currency chart on internet and see whereabout the rate is heading. If it is going up, you should act quickly or if it is going down, you should wait for a better rate?
It is also important to follow market updates to see what are the upcoming market events that could trigger a greater volatility in the market. If you are waiting for a better rate, maybe it is worthwhile to eliminate the risk factor and act prior to the market news?
Make a plan.
FX market is rapid and hardly predictable and being prepared can give you some confidence. Having a plan might help you not to miss out on anything and act straight away.
- Create a price alert and be up to date with a price.
- Have the available funds for the international payment in your multi-currency account so you can act straight away and make a payment.
- Plan for holidays and weekends so your cross-border payment does not get delayed.
- For a larger amounts of transactions have a better rate to save money.
- Split the transfers if you are not sure about the current market rate.
- Have a currency specialist to consult with. Does your provider offers a relationship manager as part of service?
You can also effectively mitigate FX risks by implementing hedging in to your overall payments and FX strategy. There are a lot of benefits of hedging but it isn’t a simple process.
We have already covered hedging strategies such as layered hedge, long put, vanilla forwards and others. Also we spoke about how to select appropriate hedging strategy and maintain hedging positions. An extensive guide into currency risk management can be found here.
How To Hedge And Exchange Currencies For Payments?
If you are looking to have a single provider for all your FX and cross-border payments needs, then keep reading on.
We would like to recommend a payments specialist IFX Payments. IFX is supporting various businesses with foreign exchange and payments solutions since 2004. They are able to offer payments in 80+ currencies and 100+ countries.
IFX Payments will provide you with a personal relationship manager that will help you to exchange currencies at the best rates and will help you setting up your own hedging strategy.
You can also read more about how to exchange currencies for payments here.
All in all, currency fluctuations is an unavoidable process of free markets and it is important to adjust accordingly. The important steps are to set a goal according to your profile, have a plan and hedge accordingly. We hope this guide will help you to manage your currency fluctuations!