The last few weeks have seen some significant movements, and with stock markets plummeting, significant protests in Hong Kong, a shock rate cut in New Zealand and an intensification of the US-China Trade War, it is easy to feel like the earth is falling apart.
The international economic and political turbulence appears to be escalating daily with each event, and its effect on currency flow cannot be disregarded. For example, President Trump’s resolution to impose an additional range of tariffs on US$300 billion of Chinese goods from 1 September has staggered international markets, and China is undertaking to retaliate on US goods. This, coupled with an international economic downshift, is creating consequential exchange rate volatility, which makes it extremely onerous for individuals and small and medium sized businesses to know how to proceed do for the best outcome if they must transfer money globally. But there are some advantages to this volatility.
The US Dollar has remained remarkably strong despite President Trump’s consistent sabre-rattling on both trade relations with China and the US dispute with Iran; and now even peace-loving Denmark has been drawn into the firing line over its unwillingness to sell Greenland in a kind of Mark 2 Alaska deal. It probably goes to prove that even with falling interest rates and a burgeoning budget deficit, if you have 10 carrier battle groups and spend more on defence that the next 25 countries combined, your currency remains the world’s reserve.
The British Pound has continued its downward trajectory, currently languishing at just over £1.00:$1.20, having moved in the £1.00:$1.45-1.70 range during 2010-2015 and somewhat recovering in 2017 from its post-referendum lows, it now seems firmly stuck back down at those level. A similar story exists in the Pound-Euro exchange rate, where the Pound performed strongly during the Eurozone debt crisis, trading at £1.00:€1.35-1.45 during 2015 but now stuck below £1.00:€1.10. This downward movement is being driven by uncertainty over Brexit, combined with a new administration that is showing signs of fiscal easing and little indication that the Bank of England may tighten again on the monetary front.
However, even the Pound’s performance looks good compared with the Argentine Peso, which fell 30% in a day following surprise victory for the populist opposition in the recent primary election.
The impact of outside forces on exchange rates makes a substantial difference to those transacting internationally, especially if you are transferring large amounts of money. For example, a business moving Australian dollars to a trading partner in the US would have seen an important difference in costs in just a few weeks over the last month. Sending US$20,000 on July 19 at the interbank exchange rate of US$0.7050 would have cost AU$28,368.79. Making that transaction when the Aussie hit its 10-year low of US$0.6677 on August 7 would have cost AU$29,953.57 – AU$1,584.78 more in the space of less than three weeks.
It is not just entrepreneurs who are affected. For example, buying a house in France may require a transfer of €200,000 from pounds. At the €1.1116 interbank exchange rate mentioned above, this transaction would have cost £179,920.83. However, if the transaction was completed when the rate was €1.0641, then it would have cost £187,952.26, an extra £8,031.43, which could have possibly made that purchase extortionate.
Volatility is a genuine issue for those making international transactions, but luckily, it is also a two-edged sword that can also present tremendous opportunities for them to gain. So, your currency decisions do not have to be muddled up just because the world presently is.
L Ndungu & N Harriss