The cost of currency volatility - FX fluctuations can impact your bottom line A brief guide to why currency markets move, recent changes in the ...
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The cost of currency volatility FX fluctuations can impact your bottom line A brief guide to why currency markets move, recent changes in the value of sterling, and how to mitigate risk.
Addressing the impact
of currency volatility
Currency volatility happens during periods of
economic and/or political uncertainty. The value of
the pound may fluctuate in response to unexpected
economic results and in the run-up to a General
Election. In recent years, the effects of volatility
have been compounded by the major issues of
Brexit and the pandemic. The more unpredictable
the world becomes, the more unpredictable the
currency market is and this volatility can lead to
higher FX costs, even if the market moves suddenly
in your favour.
2
Events causing volatility in the value of sterling
A number of events can cause market movements, here are a few examples of some of the major
moments, and how currency was affected, over the last two years.
December 2019
PM Johnson won the UK General
Jan 2019 August 2019 Election and vowed to “get Brexit done.”
Parliament rejected May’s Brexit June 2019 PM Johnson prorogued Parliament in an Confidence wavered in Europe as
deal and the EU celebrated the May resigned as leader of the effort to focus on Brexit negotiations. The Christine Lagarde took the helm at the
20th anniversary of the central Conservative party. The European Council President confirmed ECB and stated that the ECB would be
currency. Trade tensions and a unexpected possibility of fiscal that the Irish backstop was “resolute” in price stability. The US
government shutdown had little stimulus from the ECB pushed “non-negotiable”. Analysts kept a close eye President signed off in principle on
impact on the US dollar. the euro lower. on the G7 meeting in Biarritz. phase one of a trade deal with China.
April 2019 July 2019 October 2019
The Brexit deadline was delayed Boris Johnson was elected leader of The Brexit deadline was extended to 31st
until 31st October 2019, and there the Conservatives, and committed to Jan 2020, raising hopes of avoiding a
were early signs of a slowdown in the 31st October Brexit deadline. The no-deal departure, benefitting sterling
Europe as output and confidence election of Kyriakos Mitsotakis in and the euro, although the picture in
measures dropped. The US dollar Greece lessened the risk to the euro Europe remained downbeat.
benefited from rising hopes of a as the downturn continued. Trade Impeachment proceedings had little
trade deal with China. tensions between the US and China impact on the US dollar.
and the EU escalated.
3March 2020 June 2020 August 2020 October 2020
January 2020 The Bank of England cuts rates Fears over Covid-19 briefly GBP/USD hit 1.32 as the US
Trump, Covid-19 and Brexit once
The UK formally left the EU, to an all-time low of 0.1% to subsided and markets reverted failed to get the virus under
more caused movements. Sterling
with a transition period in address coronavirus pandemic. to risk-on mode. The start of control and the November
had an easy ride at the start of
place until the 31st Dec 2020. Rishi Sunak announces a the month saw increased election came into focus.
October considering the impending
Signs of a slowdown across package of up to £300bn to dollar selling, with sterling Higher than expected inflation
Brexit deadline and a new tiered
Europe, exacerbated by trade help bolster the economy. recovering over 3% at the start helped sterling make gains
approach to restrictions aimed to
tensions with the US, put However, due to the uncertainty of the month and the euro against the euro. Brexit clouds
quell the pandemic. The US election
pressure on the euro. A US air surrounding the crisis, FX struggling as the ECB tried to gathered on the horizon as
dominated currency ups and downs,
strike on Iran sent investors volatility in all currencies reach an agreement over a talks resumed and put
with the US dollar shaky in the lead
back towards the US dollar. remained at levels not seen recovery package. renewed pressure on sterling.
up to November 3rd.
since the financial crisis in 2008.
Feb 2020 April 2020 July 2020 September 2020
The coronavirus pandemic takes hold. PM Boris Johnson was The Chancellor unveiled a Boris Johnson proposed a
Countries across the globe go into hospitalised and taken into package of economic controversial bill to override parts
lockdown. Many industries are forced to intensive care while monthly support measures to of the Brexit agreement.
close, causing a global equity market sell GDP in the UK fell by 20.4%. support businesses. The EU began legal action
off. Volatility in the equity markets reached The US unemployment rate Rumours of an imminent against the UK after claiming the
all-time highs, with more than $16tn wiped rose to a record high of 14.7% agreement with the EU on bill breaks international law.
off global stock markets in less than a as businesses closed across the fishing rights gave sterling a Sterling saw a sharp drop with a
month. Investors look for safe havens, United States. boost as investors turned surge in volatility. USD
causing sterling to drop to its lowest level from the US dollar amid capitalised on this and climbed
in over 25 years. uncertainty against both the pound and
on many fronts. euro.
4GBP/EUR
Brexit fears have weakened the pound against the euro. Sterling has made some gains as hopes of an agreement rise, but overall, the pound has yet to recover from
the result of the EU referendum and struggles to hold on to any gains while the outcome of the Brexit negotiations is still uncertain.
20 000 1,4000
SPOT VS. 3M VOL
SPOT
16 000 1,3200
The spot rate is the exchange
rate at any given point in time.
3M VOL
12 000 1,2400
The 3M Vol refers to the
changing ‘Volatility’ measure of
the currency pair, a calculation
of how much it is currently 8 000 1,1600
moving, up or down.
4 000 1,0800
0 1,000
5
10 /20
1/
1/
2/
3/
4/
5/
6/
7/
8/
9/
10
11
12
1/
2/
3/
4/
5/
6/
7/
8/
9/
1/
31
31
31
31
/2
31
29
29
31
28
28
30
28
30
30
30
30
31
30
/3
/1
/3
1
/1
/2
9/
/2
/1
3/
/1
/2
1/
/2
1/
/2
/1
/1
/2
/1
/1
/2
/1
/2
9
/1
0
9
0
0
9
0
9
19
9
19
9
20
19
0
0
9
9
0
9
9
0GBP/USD
The GBP/USD exchange rate was mostly categorised by ongoing weakness until the pandemic brought the previously unassailable US dollar in check. Sterling
approached the psychological barrier of 1.32 as the country struggled to get control of Covid-19 and the economy floundered.
20 000 1,4000
SPOT VS. 3M VOL
SPOT
16 000 1,3200
The spot rate is the exchange
rate at any given point in time.
3M VOL
12 000 1,2400
The 3M Vol refers to the
changing ‘Volatility’ measure of
the currency pair, a calculation
of how much it is currently 8 000 1,1600
moving, up or down.
4 000 1,0800
0 1,000
6
10 /20
1/
1/
2/
3/
4/
5/
6/
7/
8/
9/
10
11
12
1/
2/
3/
4/
5/
6/
7/
8/
9/
1/
31
31
31
31
/2
31
29
29
31
28
28
30
2
3
3
3
30
3
3
/3
/1
/3
0/
0/
0/
8/
1/
0/
19
/1
/2
9
/2
/1
3/
/1
/2
1/
1/
/2
/1
/1
/2
/2
20
/1
19
19
20
19
19
0
9
0
0
9
9
19
20
19
0
0
9
9
0
9Managing FX transactions and currency risk
Invaluable expertise Currency tools 24/7 online platform
Movements in the currency market can have Spot Contracts apply the exchange rate on the day An online multi-currency account allows you
a significant impact on your bottom line. In of purchase and can be a high risk approach because to manage funds and currency transfers for
a rapidly changing world, it can be difficult of the unpredictable nature of the FX market. 33 major currencies through a convenient
to keep up to date with market movements. and secure online platform. You can make
That’s why we work closely with our clients Market Orders allows you to target a specific rate. and track payments, view live exchange rates,
to ensure they have the latest insights and There are no guarantees, so there is some risk, but it make use of currency tools such as forward
guidance on the range of tools available to is possible to specify maximum and minimum rates contracts and set alerts for your preferred
businesses. In partnership with our clients to limit potential losses. exchange rate and market updates. You can
we create a bespoke FX strategy that helps also manage users and approval workflows and
Forward Contracts fix a prevailing exchange rate for
to mitigate the risk of currency transactions. run real-time reports. Our platform includes a
a set period of time. This may ease pressure
Our expert team is always on hand to help suite of APIs for seamless integration, facilities
on margins and prices but presents some risk if
you make the most of overseas revenue and for bulk payments and functionality to reduce
the value of the pound improves and may require
minimise your costs abroad. administration time and resource by simplifying
a deposit.
the process for international payments.
Currency Options provide the right but not the
obligation to exchange a specified amount on
a particular date at a set rate. These regulated
investment products carry a higher level of risk and
may require an upfront premium.
7Contact us
If you want to review your FX strategy
or plan to make use of currency tools
to address FX market volatility, our
expert team are happy to help.
Get in touch with your account
manager or request a free,
no-obligation consultation.
Quote the reference “volatility”
and call or email us on:
+44 (0) 207 823 7800
corporateenquiries@moneycorp.com
www.moneycorp.com/corporate
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No 738837 Incorporated 1962.
Registerred office: Floor 5, Zig Zag Building, 70 Victoria Street,
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