Home Brexit US Election, Brexit no-deal and CV-19: Understanding the triple threat of currency volatility

US Election, Brexit no-deal and CV-19: Understanding the triple threat of currency volatility

8th Dec 20 11:45 am

A tumultuous US presidential election, the ongoing turbulence caused by the coronavirus crisis, and the resurgent threat of a no-deal Brexit are all sending tremors through the global currency markets. These three key macroeconomic drivers of 2020 will continue to loom large as we move into the new year.

Here, we explore how this ‘triple threat of volatility’ is impacting markets and will continue to do so in 2021, and how business and finance leaders can continue to grow their businesses and rebuild confidence against this backdrop of heightened uncertainty.

The US election and Biden’s balancing act

While the build-up to the US election certainly caused a wave of unease, the actual event itself was not as impactful on markets as expected. Market participants had readied themselves for a level of volatility similar to the 2016 US elections, but the more muted 2020 response was most likely due to the protracted nature of the result, the various attempts by Trump’s team to contest the outcome, and the fact that it was somewhat overshadowed by the COVID-19 pandemic.

However, there will continue to be ongoing volatility until Biden officially steps into the White House. Aftershocks tend to continue after an election result as the market digests what the decision may mean for geopolitics going forward. The currency markets could still swing either way, and finance leaders need to be prepared for the impact.

The deciding factor for the US economy, at least in the short- to medium term, will be Biden’s response to the pandemic and his ability to balance injecting life back into the economy, whilst simultaneously taking aim at US corporate tax revenue and boosting environmental regulation. Biden’s ability to shape the US economy, and to push through his promised reforms, over the next four years remains in the balance, with control over the Senate still  uncertain.

Deal or no deal? Brexit outcome still unclear

As we wait for a trade agreement or confirmation of a no-deal, the country and economy are in suspense, with the effect going forward unknown. Hopefully, we will move towards greater clarity and understanding and the variables will diminish. In the meantime, the markets are very susceptible to downside risks as a result of news flow. The immediate end-game is a Brexit agreement, but the reality is that it is still unclear whether we are going to get one. Until we have that decision, people will continue to sit on the fence, and the effect on the economy going forward is unquantifiable. Business leaders need to be prepared for a potential no-deal and the impact it could have on the currency markets.

Traders keep an eye on the Coronavirus R-number

There is now a new influencer in vogue that affects currency markets: the Coronavirus R-number. This is currently driving domestic policy decisions and therefore having a significant impact on the economy. Traders and analysts are paying close attention to the R-number alongside the usual macro data, international trade data, and changes to fiscal or monetary policy. It has provided another metric to study and another more unpredictable dynamic that leaders need to try to factor in.

As in all periods of global risk aversion, there is a general flight to safety across all asset classes, and currencies are no different. Safe haven currencies  – specifically the USD, the Swiss Franc and the Yen – have strengthened, whereas currencies perceived as riskier like the Brazilian Real and the South African Rand have all weakened.

Navigating a challenging business climate

Business leaders need to be prepared for the worst while hoping for the best. It’s crucial to put sufficient levels of protection in place to safeguard your business’s near term future, while giving yourself the flexibility and adaptability to make the most of any positive shifts if they arise, or further protectionist measures should they become necessary. Market participants have been proved wrong by things that were considered “sure things” in the past. The Brexit vote itself and the overwhelming certainty with which market participants thought a remain vote was the likely result, is testament to this.

Partnering with foreign exchange specialists can provide business leaders with the knowledge, experience and guidance they need to help them navigate a very challenging business climate. There may be risks that businesses have not considered, as well as opportunities that they are unaware of, and tools available that can help them with both.

This has certainly been a volatile period, and volatility is likely to remain the watchword for well into 2021. To stand the best chance of a successful 2021, business leaders should prepare for worst-case scenarios while remaining agile enough to capitalise on promising opportunities where possible.

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