Currency volatility is back!

Currency volatility is back!

Businesses interact with, and can be affected by overseas markets in a number of ways, such as importing products from Italy or exporting products to Australia. In many circumstances, this will involve either receiving or sending a foreign currency to or from your business, naturally exposing you to exchange rate risks. Thus, fluctuations in exchange rates can severely affect a business.

Do not be surprised if the new era of globalized zero-interest-rate policy leads to currency instability.” This is the underlying line of The Economist’s comment (4 July, 2020) on an article by Steve Englander of Standard Chartered (17 June, 2020).

During 17 February 2020 to 17 August 2020, the volatility of the New Zealand Dollar has jumped with respect to the US Dollar, the Euro and Australian Dollar, above the levels of three years ago. (The volatility in the figure is calculated as the 6-month average of the daily standard deviations of the exchange rates in the previous 30 days). This increase in volatility may not be a temporary phenomenon. For example, consider New Zealand and the Euro area. The RBNZ’s Official Cash Rate (OCR) is at its lowest level (0.25%) since March 2020 and the ECB’s Main Refinancing Operations (MRO) rate has been at 0% since March 2016. It is hard to believe that those central banks will increase their respective interest rates in the short term. Both countries need to favour the economic recovery after the Covid-19 hit in a context of inflation rates below the target value of 2%.