How to mitigate currency fluctuation amidst global volatility

Wed 12 Oct 2016

Currency volatility remains one of the greatest challenges to business in this age of globalisation.

Currency volatility remains one of the greatest challenges to business in this age of globalisation. Not only are online retailers now open for business across many frontiers and almost as many currencies, expansion into new territories presents significant challenges in simply paying staff on time.

There has been much debate about the recent increases in global currency volatility, and the ways in which it might be reduced. Yet in an age where an estimated five trillion dollars a day moves around the globe, and money markets are affected by everything from changing commodity prices to interventionist governments, currency volatility is here to stay.

Low economic growth around the world is one reason for this, as central Banks are traditionally keen to reduce interest rates in a low growth era, simply in order to weaken their currencies and drive export growth.

It is also true that while Quantitative Easing (QE) is now off the table in many western economies, Japan is likely to pursue this strategy for some time to come 

Even countries such as Denmark, which has pegged its currency to the Euro, is forced to keep its base rate artificially low in order to discourage investment in the Krone that might drive it higher.

It should also be noted that while currency volatility has been a significant factor in the global economy for a number of years, few experts believe that any kind of currency stability is likely in the short term. This is partly due to a slowing of growth in China, a predicted recession in Russia and the continued uncertainty across the Eurozone, which has been significantly exacerbated by the Brexit referendum.

In short, market forces are at work to ensure currency volatility across the globe 24 hours a day. So the question is not how to conquer currency volatility, but how to mitigate its effects through instruments such as forward contracts and hedging.

Mitigating The Effects of Currency Fluctuations

Having employees, customers and suppliers abroad exposes many businesses to risks from currency fluctuations. In fact, it is thought that some 54% of firms have suffered in some way from the speed of currency volatility, whether through profit margin reductions or increased payroll costs and delays; with the latter causing reputational as well as simply financial problems.

That's why it is essential to deal with a specialist payments provider that can overcome the risks posed by currency fluctuations.

Many of Equiniti International Payments' clients mitigate this risk through Forward Contracts. Put simply, these allow you to lock in current exchange rates, enabling you to make foreign currency payments at a pre-agreed rate in the future.

This has two significant benefits: protecting profit margins on sales against currency fluctuations and fixing the actual cost of paying overseas staff.

Importantly in the age of globalisation, we can provide Forward Contracts to businesses in no less than 26 currencies.

We also offer two ways to use Forward Contracts: Fixed contracts, which specify an exact date for the contract to be settles, and Open contracts, which enable you to draw down currency in installments over the timeframe of the contract.

So while it is impossible to rule out continued currency volatility, it is possible to protect your business from its effects, simply by working with a specialist provider which has both the expertise and the technology to mitigate these risks.