Volatility and Change
The global financial market is always changing and is prone to erratic fluctuations. Over the past years, negative currency trends saw US-based multinational companies lose more than $22 billion in a single quarter. This volatility is not isolated to the early part of the decade; changes are coming and will continue to come for the foreseeable future. So what should you watch out for in the coming years? Here is an overview of the primary sources of currency problems as stated in a 2013 webinar.
Watch; Don’t Panic
There is no reason to immediately assume that the currency market is going to implode anytime soon. Almost all financial forecasts show that most markets will continue to grow and the global economy will remain strong at least in the short term. In other words, a global crisis is very unlikely.
However, it is during times just like these when dangerous volatility can be triggered (note that volatility and global recession are not two words describing the same thing). The reason for this is simple—most market participants are slow to factor in positive adjustments and are left with huge discrepancies between predictions and actual results. When currency values end up being significantly different than anticipated, companies throughout the world will find that their financial projections don’t align with the actual results, and that problem can account for the $22 billion loss mentioned above.
You can’t change the future and you can’t directly make the market do what you want. That being said, what you can do is understand the likely causes of problems and make preparations to avoid them or minimize their impact on your company.
The political and economic climate throughout the world will have a significant impact on global currencies. The European economy has worsened over the past 4 years and will continue to do so. Part of the problem has to do with unemployment rates. In core countries the rate is lowering, while in peripheral countries unemployment has reached 20% or more.
Over the past years, most investors had been borrowing from developed countries that were still feeling the effects of the past financial crisis and then investing in developing countries which can recover much more quickly. The problem is, based on the discrepancies between unemployment in Europe and other factors throughout the world, when your borrowing position rises in value, you will lose money, and lots of it. By borrowing under such risky circumstances the volatility of global currencies was dramatically increased, leaving us where we are at today. That means currencies once considered safe are now volatile.
What to Watch For
If you are trying to plan your financial strategies around the uncertainty of global currencies, there are 4 things to watch for in the coming years.
- China is one of the most important factors in the global market. By freeing their currency they are only going to increase the volatility of currencies throughout the world. As they enter the global market, developed and developing countries will all feel the effects simultaneously.
- Europe continues to contribute to volatility. One primary factor is the German elections of 2013. Nearly half of the Germans polled were in favor of leaving the Euro. This uncertainty over the monetary future of a nation is going to lead to further volatility that must be accounted for when making financial strategies for the next several years—especially ones that involve German businesses.
- Currency wars are only going to continue, and as countries react to the dollar’s increasing value, you need to be ready for just about anything. Unfortunately, you can’t look at past circumstances or events to predict the future. Investors focusing on past volatility will find that it is increasingly difficult to find correlations between what has happened and what will.
- The average multinational corporation experiences risk from as many as 175 currency pairs. Unfortunately, it’s almost impossible to understand or manage what is happening with 5-10 pairs. Large exposure to many currencies, or smaller exposure to more volatile currency pairs, combines to create significant financial risks that must be accounted for.
What Can You Do to Minimize Risk?
As mentioned earlier, you can’t eliminate all risks. However, it is possible to make the most of the situation and still prosper, despite the uncertainty. Understanding the risks is the most important first step, but there are other things you can do right now.
The first thing you should do is upgrade your software and hardware. Taking advantage of current document management services and the software they provide will allow you to have access to all of your data in a cohesive and safe way. Add in mobile access and everyone in your company will be able to access, digest, and act on all the data you can possibly use. eFileCabinet provides a wide range of document services that will easily scale with any size of projects you are working on.
You also need to expand your analyses to cover your entire income statement. The more information you can access, the better your decisions will be. This should cover all of your portfolio currencies in order to better understand your analytics.
Lastly, communicate with your peers. Educating yourself and your company is always a priority. The more information you have about what your peers are doing, the better poised you will be to anticipate and react to any fluctuations in the global market and the specific currencies you are working with.
It is possible to move forward with confidence despite currency fluctuations. Understanding the primary causes of change will help you prepare for the future. By adding in hardware and software changes throughout your company, managing the data and information required to stay ahead of the currency curve will be a simple process. While you can’t predict market changes, you can be ready for anything.