Global Currencies to Respond to the Global Climate … Will You Be Ready?
The world is watching as Donald J. Trump officially takes the office of the President of the United States, wondering what’s in store for the next four years. If the recent cabinet confirmation hearings, last-minute actions from Obama and even tweets from Trump are any indication, it's going to be an unpredictable time.
This is just the latest addition to the fuel feeding uncertainty in 2017. Brexit, contentious talks on trade agreements and more are also directly affecting global markets. Currency exchange rates, for one, will experience fluctuation at every turn.
In this light, how can global retail businesses of any size protect themselves during times of such confusion? Is there a way to protect bottom lines from the potential global economic uncertainty?
There is, and it’s quite simple.
Although global events are out of a retail organization’s control, their currency strategy is not. Being attuned to the market and prepared to handle currency shocks or changes in exchange rates can go a long way toward protecting an organization’s bottom line. It’s all about mitigating risk by managing exposure to currency fluctuations.
For instance, the current strength of the dollar will have a big influence on importing and exporting decisions. For importers of goods, the strength of today's dollar is a boon as it allows them to buy more with less — this presents an opportunity for them to lock in today’s rates to hedge at least a year into the future. Conversely, exporters are being hurt by the strong U.S. dollar — trying to sell less for more, so to speak. For them, nearer-term hedging would make the most sense as they await more favorable conditions. For exporters using online marketplaces to share their goods with the world, using a specialist to open local receiving accounts to move funds home can save as much as $4,000 on every $200k earned overseas, significantly easing the pain of the strong USD. Fortunately, retail businesses can gain greater control over currency exchange conditions via foreign exchange partners and tools.
Tools for the Task
There are three basic tools that exchange providers offer that can go a long way to help manage currency risks and raise profits: forward contracts, limit orders and spot trades.
- Forward contracts allow retail organizations to secure a given exchange rate for up to a year. It’s an ideal buffer against adverse currency fluctuations. Retailers can rest easy knowing what to expect even amid uncertainty.
- Limit orders offer the ability to nominate a target exchange rate for international transfers. Only when the desired rate is reached do funds get transferred.
- Spot trades can be made the day of, at the established exchange rate for the day. By separating funds just for this, retail organizations can still benefit from any day-of fluctuations in their favor.
Take Advantage of Uncertainty — Play the Field
Uncertainty isn't necessarily a bad thing. Mapping out suppliers and buyers can help shape a strategy that leverages the tools outlined above. All in all, it’s a matter of how retailers choose to play the market and how well they manage their foreign currency exchange.
Hiding from the global market in times of uncertainty isn't the answer; embracing a multitude of markets is. It’s a good time for businesses of all sizes to consider diversifying their target markets and spreading out their exposure. Keeping an eye out for low-cost marketplaces to broaden consumer bases will protect retailers against massive hits as policies change in any one region. Once overseas, partnering with an international payment provider will save retailers money when bringing that money back home.
Ultimately, it remains to be seen what 2017 has in store for all of us. However, if retail organizations play their cards right, they can improve their chances of securing not only financial stability, but success.
David Nicholls is head of payment solutions at OFX, a secure international money transfer provider.