Why central banks matter for your company’s foreign exchange risk

The U.S. Federal Reserve and the Bank of Japan have their monetary policy meetings scheduled for this Wednesday. Beware of potential currency volatility; it might be one a nightmare of a day for CFOs.Businesses need a predictable environment with limited risk to operate properly. Unexpected situations are utterly inconvenient as they might negatively impact their operations and their profitability.International businesses are particularly sensitive to these impacts as they are more exposed to currency exchange. As a rule, these markets are highly volatile and can fluctuate wildly when central banks begin to make noise.

Fed and BoJ monetary policy meetings

All eyes will be focused on the monetary policy meetings of the BoJ and the Fed Wednesday, with their decisions potentially having strong and immediate impacts on the dollar and the yen, and probably boosting volatility in all currency crosses.The Bank of Japan is expected to disclose a new set of monetary easing measures to kick start the country’s ailing economy and, hopefully, to curb the strength of the yen. These measures are meant to counteract the negative effects weighing on Japanese exports, which are an essential part of the country’s GDP.Later in the day, the Federal Reserve is expected to show some hints about its plans to normalize its monetary policy, after having changed its mind several times throughout the year. With only two more meetings left before 2017, and with the U.S. presidential elections in November, the Bank will have to clarify whether or not they are planning on hiking rates for December.

Hedge your foreign currency risk

These events might have relevant repercussions in currency markets. At the last Federal Reserve meeting, held on July 27th, the Bank showed a cautious stance regarding monetary tightening. Over the next three days, the dollar tumbled 2.5% against the euro, 2.2% against the pound, and 5% against the yen, triggering sharp fluctuations in all currency markets.[caption id="attachment_27192" align="aligncenter" width="873"]

Fed meeting's impact on the EURUSD[/caption]Many businesses might not be able to easily adapt to these sort of fluctuations. Companies in the travel or in the ecommerce sector, among others, are often working with profit margins as low as 5%. A 1% fluctuation in currency might slash as much of 20% on their profits. In turn, a 5% fluctuation would eat up 100% of their profits. Don’t risk your company’s bottom line if your books are exposed to foreign currency markets. Analyse your business needs and find the most appropriate solution to hedge your international business lines against adverse currency movements.Want to know the most appropriate hedging solution for your company? Click here.