Breathing space on the currency market offers good opportunities

The dollar has completely stabilized in recent months. It's only a matter of time before the lifting of the American data fog or a surprise move by Trump sets the market in motion again. Until then, there are excellent opportunities for entrepreneurs.

Anyone following the news might expect the euro/dollar exchange rate to have been bouncing around in recent weeks. Across the Atlantic, parts of the economy have been at a standstill for weeks due to the lockdown. Moreover, businesses have been repeatedly misled by President Donald Trump's trade policies. Meanwhile, political uncertainty in Europe remains high. In France, a prime minister was appointed for the sixth time in two years in mid-October. The country has struggled to balance its budget. Sébastien Lecornu, who resigned earlier, once again faces the thankless task of ensuring fiscal stability and restoring some of the confidence of financial markets.

Strikingly quiet
Despite the considerable uncertainty, the currency markets are remarkably quiet. The difference between the lowest and highest dollar rates since the end of June is only 3%. By comparison, in the first half of the year, that was over 15%. And in the final months of last year, exchange rates fluctuated even more. The relative calm is partly due to the predictable interest rate policies of central banks and the lack of new economic data following the US shutdown. Another factor is that traders have now become accustomed to Trump's trading impulses. I notice that clients for whom we map currency risks and opportunities are tempted to shift their focus to other matters for a while. Nevertheless, it's a very good idea to reassess currency policy now.

Stormy comparison
This may sound strange, but a simple comparison quickly reveals the advantage. The time when you need storm insurance most is usually also the most expensive. If, according to the KNMI (Royal Netherlands Meteorological Institute), wind force 10 is on the way, insurance premiums will be high. This is also how it works, to a certain extent, in the currency world. In periods when unrest increases rapidly and exchange rates fluctuate significantly, it is relatively expensive to cover the risks.

Data Mister will be leaving soon
In recent weeks, the currency markets have been incredibly quiet. Or, to use the storm insurance analogy: it's practically windless. As a result, the cost of hedging currency risks is currently very low. There's a good chance a strong breeze will pick up again in the coming weeks. When the US government's radar starts turning again, a wealth of data on the labor market, inflation, and the economy will be released, potentially triggering a reaction in the dollar's exchange rate. This is therefore an excellent opportunity to carefully review currency policy now, so that we're fully prepared for the next financial storm.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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