What global trade trends mean for currency
Throughout history, the trade of goods and services around the world has ushered in the emergence of a ‘global economy’. But what does the future hold for global trade and foreign exchange markets?
In this Q&A from MoneyWeek with the experts at OFX - a global money transfer company that helps clients transact across borders when, where and how they want to - Alex Edwards, Head of Corporate Clients at OFX and Hamish Muress, Senior Currency Strategist at OFX discuss the future of global trade and what this means for foreign exchange markets.
MW: Looking beyond short-term issues such as Brexit, what should businesses be thinking about in the money markets?
Alex Edwards (AE): The reality is that it’s very hard to look beyond Westminster right now, because Brexit is so all-consuming, but there is one benefit to that which will hopefully feed through for an extended period. There’s no doubt that the volatility caused by Brexit has made businesses much more conscious of exchange rate risk – and the fact that this is an issue that they can plan for.
Hamish Muress (HM): In fact, I think Brexit is just part of a longer-term trend that will have a significant impact on global trade. It’s one element of the rise in nationalism and protectionism that we’re now seeing in many parts of the world. It’s been clear for some time now that the instincts of many in the US and even in parts of Europe are to move away from the free trade that we have all previously aspired to.
MW: What would that mean for foreign exchange?
HM: It is inevitably going to lead to elevated volatility. What upsets markets and investors more than anything else is uncertainty – whenever the status quo appears to be changing, the effects are very unpredictable. Political interventions in the form of new regulation, trade tariffs, tighter border controls and so on are only going to increase uncertainty and volatility.
MW: Are you saying we’re heading for a less globalised world?
HM: No, I think we’ll continue to see global trade increase, but we’ll also see governments indulge in more protectionist policies, not least in response to the populism we’re now seeing in many countries.
AE: Either way, currency risk is very much here to stay. The challenge for businesses in the UK is going to be how they manage that risk: greater volatility means potentially bigger impacts on the bottom line, but also increased unpredictability that is more difficult to anticipate.
MW: How to businesses confront that challenge?
HM: The determination of so many British businesses to internationalise is something that we should all welcome – from an economic perspective, increased international trade can only be a good thing. But businesses are going to have to think hard about their currency risk at a very early stage; how they manage this risk should be an integral part of their strategy for internationalisation.
AE: It’s going to be crucial to think more holistically about these issues. We’re naturally very focused on exports, but part of the story of globalisation is the extent to which supply chains are now international. Many companies are sourcing materials from overseas before they even begin selling in international markets. They’re heavily impacted by exchange rate volatility too – that sometimes comes as a shock.
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MW: What else do you see driving these issues?
HM: The way in which the trade dispute between China and the US is finally resolved will be important for many different reasons, but one significant question is what it means for China’s exchange rate policies. The US has been very keen for China to allow its currency to trade more openly, rather than for the Chinese to manipulate the value of the yuan as part of their international trade strategy. A good outcome for the US would be a more freely-traded yuan. Given the importance of China as both an importer and exporter, that’s going to make a big difference to businesses all around the world.
AE: I agree with that, but I think we’re probably five to 10 years away from seeing significant changes to China’s approach to foreign exchange. As British businesses’ trade with China increases, these are going to be questions they need to keep a close eye on, but it’s a tough one to call.
MW: So further uncertainty to come then?
AE: Yes. The big picture is further growth in international trade and a world economy where globalisation continues to be a dominant theme. But there are so many details within that picture with the potential to have very significant impacts. The foreign exchange market is the most liquid financial market in the world, which means it’s also more sensitive and reactive than any other.
HM: I come back to where we started. If Brexit has taught us anything it’s that foreign exchange volatility can have an enormous impact on the bottom line of the business, even over a relatively short period of time. There’s every reason to think that British businesses can achieve their ambition to increase overseas sales and it’s the right target to aim for. But a crucial part of achieving success as you internationalise is going to be your ability to manage currency risk. That is becoming more and more fundamental.
OFX has currency experts worldwide, so you’ll always be able to ask questions or discuss your currency requirements with someone 24/7 no matter where you live. If you would like to get in touch with our global currency experts, please call +44 207 614 4194 or email us on firstname.lastname@example.org. Or register through our dedicated IET members page here. Now more ever, this is the time an OFX currency expert can help you make informed decisions at the right time, so you can make the best of market volatility.
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