As we’re seeing with the COVID-19 crisis, very little in our economy is purely local.
Currency markets are one example. The markets are reflections of what is happening globally. They serve as the ultimate sentiment indicator, telling us what the future may bring for a country, region or the world at large.
But the sentiment can be costly — changes in currency rates can alter business costs in the blink of an eye. Still, many have no understanding of how currencies work, an opportunity ripe for your bank to offer some education.
While most would assume that the stock market is the biggest asset class on the trade block, it pales in comparison to currency trading volumes. Bloomberg reports that $6.6 trillion USD traded daily in 2019.
Since the 1920s, the U.S. dollar has enjoyed a long period of stability. This has allowed most business owners to go about their lives barely giving currency a fleeting thought, except perhaps when they’re traveling abroad or making a major international purchase.
But here’s another surprising undercurrent to this impression: Much of what we think of as domestic buying is an illusion.
Your business clients may buy a product from a local manufacturer, but where does that manufacturer buy its machinery? Where do they buy supplies to create their goods? Even local businesses tend to have international partners somewhere in their supply chains. Because of this, prices of the local goods are affected by currency rates.
Further, the world of currencies is surprisingly abstract. The U.S. dollar doesn’t have a single price. It has a unique price relative to the 200 or so other currencies in the world.
All of those prices fluctuate moment to moment because currency rates aren’t anchored by specific metrics. Instead, they reflect how buyers feel about the economic outlook of one country compared to another at any given time.
Buyers speculate about a country’s future inflation and interest rates, as well as intangibles like politics and socioeconomics. The pricing of currency is more art than science; more emotion than math. It’s enough to make heads spin.
The speculative nature of currency valuations makes them volatile. They are highly susceptible to world affairs; bad news can easily send them into an overnight tailspin. The global coronavirus crisis is the most recent example of this, sending currencies around the world reeling.
This is why your business clients can no longer be complacent. Outside the pandemic, previously stable countries have become unsettled by climate change. Once developing economies are maturing. It’s no longer the case that any particular currency is the safest bet. More and more, the name of the game is currency diversification.
But the good news is, your bank can help business clients protect themselves from currency fluctuations. The first step is to figure out how they’re at risk.
Advise business owners to figure out what percentage of their costs are in foreign currencies. If rates changed and suddenly those costs were 15% higher, could they absorb it? What about 20%? What is their back-up plan if they can no longer afford these suppliers?
Based on what they discover, your clients should consider diversifying their business costs through currency to help reduce the chances of over-exposure to any particular one.
Finally, advise your clients to increase their awareness of currencies. Suggest that they select a few that most affect their business and track them to see how their movements could affect their company’s well-being over time.
It’s true that uncertainty is always part of life, but preparation creates resilience.