Mitigating Currency Risk: Results of the AFEX Currency Risk Outlook Survey
by Guido Schulz, Chief Strategy Officer, AFEX
AFEX, one of the world’s largest non-bank providers of global payment and risk management solutions, announced the results of its inaugural Currency Risk Outlook Survey recently, indicating that a vast majority (88%) of its clients in the US, UK and Australia foresee currency movements to be as or more volatile in the next 12 months than the preceding year. The survey polled 452 businesses around the world and found that half of the respondents will employ a hedging strategy in 2014, with more than a third (35%) expecting to hedge more than they did in 2013.
Connected world markets
The end of the first decade of the 21st century saw currency markets experience volatility, as first the sub-prime loan crisis rattled long-standing Wall Street institutions and then the Eurozone crisis took root. These events served as a perfect storm to undermine the global financial system, in turn forcing the hands of central bankers to manipulate their interest rates and currencies in the hope of reviving stagnant economies.
No one knows for certain how currencies will move over the remainder of 2014 but we can anticipate the potential for certain pairs to be more volatile than others. Due to the tapering programme, emerging market currencies will likely be under pressure for the remainder of 2014. Not all businesses deal with emerging markets but many do transact business in South East Asia and or South America. Both are geographical regions with current economic and socio-political issues and a resulting cooling of the once vibrant economic growth potential.
The so-called BRIC countries (Brazil, Russia, India and China) and other emerging markets such as Argentina and Turkey are experiencing setbacks and are no longer the steady drivers of economic growth that they were following the 2008 financial crisis. When the US Fed initiated its first $10 bn pullback from the bond market, these were the first currencies to be hit.
At the same time as all of these geo-political events are occurring, the world is growing more closely interconnected with cross-border trade escalating, with more businesses looking overseas for growth. Levels of international trade are set to climb, with 37% of businesses surveyed seeking to conduct more global commerce than in 2013, with Western Europe, China and Asia (excluding China, India & Japan) expecting to see increased trade.