How do global events impact foreign exchange rates and international money transfers?
Monday 06 April 2020
Given that we live in such an interconnected world, it will probably come as no surprise to learn that global and even localised events can have a substantial impact on a whole host of financial markets including shares and currency.
As Nigel Fox, Managing Director at TorFX, explains, in recent years, everything from natural disasters to political events like Brexit and, of course, the recent outbreak of COVID-19, have had an effect on the global currency market.
“The currency market is highly sensitive to almost all global events and shifts can be particularly notable if the events create uncertainty – as we’ve seen with Brexit and, more recently, the coronavirus.”
“Smaller national or localised events can trigger movement in just the currencies of the countries affected, while global concerns can inspire significant volatility across the currency market.”
In the case of the recent outbreak of COVID-19 - which has caused considerable reverberations in financial markets around the world - currencies have been in a real state of flux and investors have rushed towards safe haven currencies such as the US Dollar.
“The coronavirus pandemic stirred up some extreme volatility in currency markets through the second half of March. This volatility has been so dramatic as to see daily swings of 1% in many currency pairings. The GBP/USD currency pair even crashed to a 35-year low,” said Fox.
“Demand for safe-haven currencies has surged during this time as economic activity around the world grinds to a halt due to government lockdowns, with markets panicking over fears of a global recession and uncertainty of how long the coronavirus crisis will last. It’s safe to assume this volatility will remain for some time to come.”
How is the Australian Dollar (AUD) impacted?
So what effect do global events have on the Australian Dollar and what impact does this then have on international money transfers (IMT)?
Well, that depends on the particular event which is causing currency volatility.
For example, during the Brexit process, there were considerable fluctuations in the price of the Australian Dollar versus the Great British Pound. Uncertainty over the United Kingdom's exit date from the European Union resulted in the Pound sinking, while news of a Brexit deal had the opposite effect.
Another example can be found in the case of the recent COVID-19 outbreak, during which time (at least, so far) the AUD has fallen against a number of major currencies including the USD.
According to a publication ‘The possible economic consequences of a novel coronavirus (COVID-19) pandemic’ from PWC, as the Chinese economy slowed down following the outbreak of COVID-19, the AUD, which is closely linked to the Chinese Yuan (RMB), plummeted against the USD.
In fact, in mid-March, the AUD/USD currency pairing hit levels not seen since the GFC.
So what does this all mean for Australians wanting to make an international money transfer in times of volatility?
Depending on your needs and urgency, it could either be an opportunity to take advantage of favourable rates, or it could mean looking for ways to safeguard yourself against getting an unfavourable rate when you make a transfer.
To help you out, TorFX has also outlined a few actions and options Australians can consider before making an international money transfer during a global event.
1. Subscribe to currency news and rate alerts
“If you’re worried about the potential impact of currency volatility on your international money transfers, staying up to date with the latest currency news is the best way to time your transfers effectively,” Fox recommended.
To keep you in the loop, many specialist IMT providers, including TorFX, allow you to sign up for daily updates sent straight to your email. Additionally, setting up rate alerts could be a simple and effective way of keeping track of a currency (or currencies) you’ve got your eye on.
“You can also use a rate alert to target a specific exchange rate without any obligation to trade. Set your target rate and you’ll be notified by text and email if your rate is hit. You can set multiple rate alerts at a time.”
2. Make use of a forward contract
“There are also services you can use to protect your transfers or capitalize on any shifts in the exchange rate. For example, if you like the look of the current exchange rate but are concerned it could weaken you can use a forward contract to fix the rate for up to two years ahead of making a transfer,” said Fox.
The potential downside is that you may miss out on rates becoming even more favourable, so you’ll have to weigh that up before locking in a contract.
3. Place a limit order
“Conversely, you can use a limit order to target an exchange rate higher than the current market level. Simply set the rate you want to achieve and your transfer will take place automatically as soon as the market moves to that level,” said Fox.
For more information about forward contracts and limit orders, check out our handy guide on the features and benefits of IMT.
Ready to set up a transfer? Head on over to Mozo’s international money transfer hub for the latest rates as well as a range of news, guides and other resources.