Currency fluctuations have long been a key challenge (or opportunity) of international trade. Fluctuations are caused by a myriad of complex factors, and there’s no sure-fire way to predict which way a currency’s value will go. But staying on top of events that typically have an influence on fluctuations may help you to better formulate your hedging strategy.
While the events and sentiments that influence currency fluctuations are numerous, three factors may be making more waves than usual:
A record-breaking year for elections
Whenever an election is held, it can impact currency values. The elected government’s views on protectionist measures, interest rates, tariffs, trade agreements, economy-building efforts and other policies can all raise or lower the currency rate.
But 2024 is a record-breaking year for elections, with 64 elections going on around the world, in addition to the European Union. These countries account for 50% of the global gross domestic product (GDP) and will involve 4.2 billion citizens—about half the world’s population.
To top it all off is November’s election for our largest trading partner, the United States. Protectionist policies, as just one example, are being discussed on both sides of the American political aisle. With about three-quarters of our exports going south of the border, Canadian companies will want to take a careful look at their hedging strategies. And the U.S. isn’t alone. China, India, Brazil, South Africa, and Argentina are just a handful of markets known for their strong protectionist policies.
Economic surprises and changing sentiment
Economic forecasts can affect sentiment, a key influencer for a currency’s value. But forecasts aren’t an exact science, and 2023 was unique. The expected growth for Europe and China lagged, impacting their currencies, while the U.S. didn’t go into recession as expected, causing the greenback to stay strong and keeping much of the global economy afloat. More than half of foreign exchange trades involve the U.S. dollar, making it critically important as it can influence how other currencies perform.
Geopolitical tensions and constrained shipping routes
While there’s high awareness of the wars happening in two regions, both critical to the world’s food and energy supplies, there are actually 110 armed conflicts in the world today—many in emerging and developing markets. One way geopolitical tensions can impact currency values is by constraining or blocking supply chains. For instance, the Houthi attacks on vessels in the Red Sea disrupted shipping through the Suez Canal, which typically supports 30% of global container traffic.
What other factors contribute to currency fluctuations?
- Macroeconomic factors such as interest rates, inflation rates, GDP growth, and unemployment. For example, a country with higher interest rates and economic growth is more likely to attract foreign investment, leading to a higher-value currency.
- Central bank policies such as interest rate adjustments, economy stabilization efforts and quantitative easing measures.
- Market sentiment and speculation, influenced by news events, economic outlooks and central bank announcements.
- Over- or under-valuation of a currency; when the currency corrects, it may over-adjust rather than achieving fair value.
- External shocks and unforeseen events such as natural disasters and pandemics.
