Insight to All Things Currency and Treasury Management

FiREapps’ CEO Wolfgang Koester had some great airtime last week – on CNN and CNBC. He talked about how we’ve now seen four consecutive quarters of sustained high currency volatility and how it shouldn’t surprise anybody that we’ll continue to see that kind of volatility – or worse – in quarters to come. Here, he expands on some of the points he touched on in those interviews.

The ripple effects of yuan volatility

I talked with CNN last week about how China’s currency moves have sparked significant volatility because the People’s Bank of China (PBOC) doesn’t communicate with the market in advance. Since that interview, we saw a 7% drop in China’s stock market and the PBOC intervened to prop up the yuan. That means more uncertainty. To be sure, there are surprises to come out of China that we haven’t seen yet.

Volatility caused by yuan surprises is not a new topic for us; we’ve been talking about it since 2012 (as in this blog post, Themes We’re Watching in 2013: How Will China Liberalize the Yuan?). Late last year, when Morgan Stanley suggested that 2016 would be “Yen Year” I explained in CFO Magazine why I believe “Yuan Year” will turn out to be a much more apt characterization – and how popular consensus that a free floating yuan would appreciate might turn out to be very wrong.

Last week I didn’t get a chance to elaborate on the impact the yuan could that have on other currencies. I’ve written (as in Forbes) about the impact of China’s moves on multinational corporations. But yuan swings also impact other currencies around the world, including elsewhere in Asia and in Latin America. In Asia, yuan volatility is especially impactful on free floating currencies in the region. In 2015, when China widened the yuan trading band, volatility increased among many Asia Pacific currencies as other countries took action to attempt to maintain parity against the yuan.

Another example of yuan volatility creating a ripple effect around the world is Brazil. China is Brazil’s largest export market by far, importing half of all the commodities products that Brazil exports. The real has been extremely volatile – not only because of devaluation of the yuan, but in part because of it. Bank of America, for example, said that a 1% move in the yuan is associated with a 0.5-0.6% decline in commodity prices – which hits Brazil particularly hard.

The bottom line is that the yuan story is evolving, and we’re in uncharted territory. This is the world’s second-largest economy taking steps to float its currency. It is a huge change that will impact currencies, economies, and stock markets around the world.

Volatility in the Middle East

Until it happened, the idea that “austerity” and “Saudi Arabia” would occupy the same sentence was unfathomable (though it’s all relative). Last week Saudi Arabia announced a tight budget, raised electricity rates for the largest consumers, and ordered higher fuel and gas prices for everyone. The move came as a surprise, and surprises are what have caused much of the recent currency volatility.

What other surprises lie in wait? We could see more surprises out of the Middle East given the intense geopolitical turmoil there. We will see more surprises out of China. Latin America, Eastern Europe – who knows where the impact could come from next.

Trouble in Europe

Just as the U.S. Federal Reserve Bank has begun to raise interest rates, the European Central Bank continues to ease monetary policy. That divergence between monetary policy in the U.S. and in Europe has and will continue to create pressure on the U.S. dollar and the euro, which could lead to volatility in those currencies.

Beyond monetary policy, there are other signs of trouble in Europe. The economies remain weak. An article in the Financial Times the other day made a strong case for the United Kingdom to remain in the EU; the mere fact that secession is being seriously discussed is worrisome. In Germany, the lone bright spot for much of the euro crisis, people don’t understand yet what it means to have a million people immigrate within such a short period of time – that will have a negative impact.

Bottom line

Much attention has been paid to the U.S. dollar. To Europe. To commodities markets. All have certainly caused volatility, and currency impacts for companies that aren’t managing their exposure. But a lot of volatility on 2015 came from currencies and markets that weren’t headlining. That will continue to be the case in 2016. I’ve called out some particular sources of surprise, but the point is that trying to predict where the next surprise will come from, and guard against it, is like playing whack-a-mole.

The only way for a multinational company to avoid currency surprises is to manage exposure across the entire portfolio of currencies it does business in. Fortunately, technology makes that possible. (Fast forward to 0:31 in the CNBC interview to hear me explain how.) And investors can differentiate between the companies that have eliminated currency surprises, and those that haven’t. (Fast forward to 2:20 in the CNN interview.)