Companies, traders and investors around the world are
under increasing pressure to find new ways to manage risks and limit their exposure to major shifts in foreign currency exchange markets, where some $5.3 trillion of value is transacted per day, according to Bloomberg Data. Ever-greater attention is being paid to the myriad factors that impact currencies in relation to the dollar, and many firms are turning to new tools to help. FX modeling in a changed world Creating models to predict the paths currencies will take over a period of weeks, months or years has changed since the global financial crisis of 2008, according to speakers at a recent Strong Dollar event at Bloomberg Headquarters in New York. Central banks and governments have aimed to encourage economic growth through the monetary policy of low interest rates and quantitative easing, and event
participants noted these are not necessarily working as
well as hoped. A low interest rate environment does not always spur growth when individuals and corporations economic confidence and financial position are already heavily damaged. When it comes to FX trading, the issues that need to be tracked and considered have evolved. These now have as much to do with geopolitical events, in developed and emerging economies, as with decisions made by central banks, speakers stated at the event. Also, while opinions in the market vary on whether emerging market finances are destined to strengthen in 2016, it was argued that their performance and growth potential ought not be overlooked in any contemporary FX trading scenario, nor should prospects relating to commodity prices. Predictable and unpredictable risks Those speaking at the event discussed a number of risks that have the potential to impact foreign exchange markets to a considerable degree in the coming months:
The UKs referendum, in June, regarding its
membership of the European Union:Panelists warned that a Brexit vote could have major damaging consequences in Europe and beyond. Renminbi rates, as Chinas economy grows more slowly than hoped:The opaqueness of the market and of future policy was highlighted as a concern by panelists. Elections in the U.S., Japan and beyond:Panelists noted the potential to impact how international currencies behave in relation to the dollar. Possible rising U.S. interest rates:The recent release of minutes from the Federal Open Market Committees meeting in March indicates there is at least some consideration for this to happen relatively soon. A Fast changing political and economic environment:Damaged market confidence and a lack of clarity of what will happen next are causing volatility. Improving analysis and guarding against volatility
In the coming months, the progress of foreign currency
markets worldwide against the dollar remains highly unpredictable, and experts on the panel took differing views on what the latest data means in these contexts. Most of the panelists leaned towards a bullish outlook on the dollar, seeing its overall run and the U.S. economic potential. But the bearish viewpoint was also heard: Some tough U.S. retail figures outside of autos, and the Chinese worries could hurt the dollar. What matters most today for corporations, traders and investors, is that risks are understood as well as possible and that currency volatility is well guarded against. That imperative is driving interest in index instruments that help hedge against currency exposure. One example is the recently-introduced CME Bloomberg Dollar Spot Index futuresa contract now available for trading on the CME Globex electronic trading platform. By representing real trade flows into the US, BDI aims to measure the worlds top-traded emerging and developed currencies against the dollar more accurately.
Experts at the Strong Dollar event said there is no
denying that the geopolitical uncertainties require a smart reaction. In such a world, the right processes, market access and benchmarking are vital to stability and success. By having a better understanding of currency potential and trading with an index dynamically weighted to current realities, those in the FX derivatives market stand much more chance of success in a tough environment.