Winter is no longer coming – it’s here. Last month, the world was a relatively predictable place. Sure, a reality TV show host was still in the White House, and BoJo was making a mess of Brexit trade negotiations. But, for the most part, smart analysts could still make sound financial decisions.
But then, Mother Nature showed us who was really in control. In weeks, COVID-19 has turned our way of life upside down. In its wake, businesses and individuals have been scrambling to adjust.
Apart from the human toll, though, impacts on global financial markets have been the most profound. At press time, the Dow Jones has fallen 24% from its peak of 29,000. Over the months ahead, though, further plunges are likely.
FX markets have also been hard hit, with even traditionally stable currency pairings fluctuating wildly. This state of affairs is hugely troublesome for those that transfer capital consistently. Now more than ever, it is vital that they engage in hedging tactics.
FX Markets Haven’t Been This Volatile Since The Great Recession
Except for flash crashes or surprising economic reports, currency pairings are usually stable. Under normal circumstances, rates move up/down at velocities measured in fractions of a per cent.
Of course, what we’ve been going through lately can hardly be described as normal. At the start of March, the COVID-19 outbreak was spreading at a worrisome pace, with new hot spots emerging in Iran and Italy. But elsewhere, life and trading went on as usual.
Then, within a week or two, everything fell apart. Athletes from major sports leagues tested positive for Coronavirus, leading to the indefinite suspension of play. Political leaders worldwide disclosed that they too were infected. From U.S. Senator Rand Paul to Prime Minister Boris Johnson, the deadly bug was EVERYWHERE.
Borders began slamming shut. Hoarders grabbed all the TP they could get their mitts on. Shelter-in-place orders became de rigeur around the world. Traders are being forced to confront a new reality – we are likely heading towards a deep global recession, if not a depression.
Right now, the market is still trying to make sense of the new world we find ourselves in. If you’re a trader, that means one thing – volatility. Investors regard the VIX as an indicator of market fear, or instability. During March 2020, it peaked at 82.69 – 10 points higher than its peak during the 2008 market crash.
For an example of how crazy FX volatility has been lately, look no further than USD/CAD. Economic ties are strong between these North American countries. Typically, this means stable currency rates.
However, the chaos of the last month caused this rate to shift radically. On March 1, the USD/CAD rate stood at 1.34. On March 22, it peaked at 1.46, and at publication time, this rate stands at 1.42.
What happened? Two factors were at play – first and foremost, Canada is a petro economy. The mass shutdown of travel and non-essential industries tanked the price of oil, as did the Russia-Saudi price war.
Two, investors see the USD as a safe haven in times of uncertainty. As the market began to tumble, retail investors moved to the perceived safety of cash en masse.
No matter the reasons, though, one stark fact remains – tectonic shifts like these can DEVASTATE businesses. 1%-2% shifts can cause significant losses on large transfers. But nearly 10%? Changes like these can bankrupt those who have failed to prepare for black swan events.
Some Online Money Transfer Providers Offer Hedging Tools
Fortunately, you’re not entirely at the mercy of the markets. It is possible to protect your bottom line from cataclysmic events by embracing hedging tactics. If your bank/broker does not specialize in them, rest assured that many other business oriented foreign exchange services DO.
What hedging strategies do these firms offer? Of them, forward contracts are easily the most important. When you have a significant transfer upcoming, or regular recurring transfers, these can protect you by locking in a rate. In other words, you give up the best possible price in return for one that’s slightly worse, but secure. Over the past month, forwards likely saved investors, businesses, and individuals untold MILLIONS of dollars.
What’s more, limit orders have actually HELPED some traders take ADVANTAGE of the current crisis. These hedging tools allow their users to move money IF a specific rate is achieved. For instance, when USD/CAD was hitting unprecedented heights in March, limit orders helped traders move their capital at unreal prices.
Dedicated Dealers Can Help Guide Your Business Through This Storm
Forwards. Limit Orders. Hedging. You’ve only just added these words to your lexicon. As such, it’s understandable if all of this is still confusing to you.
You’re far from alone. That’s why the best Forex firms retain the services of dedicated dealers. These experts stay on top of the latest developments – this allows them to make personalized recommendations to their clients.
For instance, most didn’t see the current mess coming. Meanwhile, the second the virus spread beyond China, dedicated dealers would have known that trouble was on the horizon. They would have strongly recommended the use of forwards in March and beyond. As the market was unravelling, they would have encouraged the use of limit orders to take advantage of the chaos.
If geopolitics and finance aren’t your forté, dedicated dealers can serve as your guide.
Stormy Conditions Make Skilled Sailors
Once-in-a-lifetime disruptions, like a global pandemic, can be a scary time to be in business. But things could be worse. You could be one of many millions of employees who just saw their income drop to zero overnight.
As an entrepreneur or trader, the means of production are in your hands. By making wise decisions in tumultuous times, you won’t just survive – you’ll be setting yourself up to thrive.