Currency Risk Management Strategies in 2017


The two key events that dominated the international political landscape in 2016 – the June Brexit vote in the U.K. and the U.S. election in November – had a pronounced impact on global foreign exchange markets.

Brexit in particular served as a stark reminder of how quickly political instability can translate into financial market volatility – the almost instantaneous collapse in the value of the pound caught many unaware and the ongoing ambiguity around the U.K.’s exit from the E.U. has ensured it remains a volatile currency that is subject to occasional intra-day price gyrations, particularly against the USD.

As the Brexit dust settled the world turned its attention to the U.S. and the November election. For the weeks and months leading into the contest it seemed a foregone conclusion – it would be Mrs. Clinton off to the White House. Financial markets were relatively calm. However as the polls tightened and a Trump victory became a potential reality a sense of nervousness emerged. What would a Trump presidency mean? No-one really knew.

As the votes were counted and a Trump victory was confirmed we saw asset price movements that challenged the prevailing orthodoxy which dictates that at times of heightened uncertainty it is best to liquidate risky assets such as equities and invest in “safe haven” assets such as gold, Japanese yen and U.S. treasuries. The post-election rally in the USD, S&P 500 and the sell-off in gold, JPY and US Treasuries is not really what the market was expecting (and may have inadvertently ended the careers of some professional fund managers!).

The point of all of this is that in 2016 neither the polls, nor the markets, nor the media were correct in predicting any of these “key event” outcomes. The unexpected results have delivered some large price moves in currency markets. If you had a personal or business foreign currency requirement in 2016 and the price moves worked in your favor – well done. If, as would be the case for many consumers and commercial enterprises, they didn’t go your way you will be acutely aware of how adverse price moves can present a very real risk to your cash flow management.

How will global events affect currency exchange rates in 2017?

As we look ahead to the remainder of 2017, it makes sense to review the calendar to identify other key events that have the potential to cause significant volatility in currency markets. As it happens, we need to look no further than to Europe where elections in three of the founding member states of the E.U. could dramatically alter the European political landscape in 2017.

European elections could make 2017 rocky for international businesses

Will the rise of anti-immigration, anti-trade, and nationalist parties continue to grow in Europe? If they gain material ground it may lead to more nations threatening to leave the E.U. as well as potentially making the E.U. negotiations with the U.K. more complicated (if that is possible!). Expect volatility in the euro and sterling, particularly against the U.S. dollar, should political unrest in Europe continue.