Currency markets – a long, bumpy ride ahead?

Carl Hasty, head of trading with Smart Currency Exchange offers five reasons why further exchange rate fluctuation is on the horizon.

1 Unrest in the Eurozone
As long as instability in the Eurozone continues to play out – and there is certainly no end in sight – the value of the euro will fluctuate. The Eurozone’s list of problems goes on and on – from huge debts in the likes of Greece, Spain and Italy to disagreements about how such debts should be tackled. Is greater fiscal integration the way forward? How long does the ECB keep on handing out bail-outs? There are more questions than answers – leading to euro instability. In theory, the issues outlined above would lead to further weakening of the euro in the coming months. However, other currency regions around the world are not without their own problems.

2 Inflationary threat
The phrase ‘quantitative easing’ has entered the mainstream as central banks in the UK, Europe and US have gone into overdrive to try and stave off recession. Around £275bn has been injected into banks in the UK. The European Central Bank recently pumped €529.5bn into Europe’s banks – on top of €489.2bn of similar loans injected in December. In the US the Fed put in $600bn in 2011. Monetary injections of such magnitude represent unchartered territory for Western financial systems. Nobody knows what affect they will have on inflation and the value of respective currencies in the UK, Europe, US and beyond.

3 The US trade deficit
Importers of Californian wine will have noted that the sterling/dollar exchange rate has been volatile of late. The US is a strange one. On the one hand, the dollar offers a safe haven for investors - especially given issues in the Eurozone. And yet, there is the US deficit. This is a country that had a trade deficit equivalent to $48.8bn in December of 2011. While the US may well have run deficits for the past three decades, the sheer size of its deficits in recent years is raising growing concerns. Before long, it will require growth to service this deficit or a weakening of the dollar may result.

4 Shifting global power
There are signs that China – possibly India also - are on a path to overtake the US and other Western countries in terms of economic might. Latin American countries such as Brazil are also a huge threat to Western economic power. The financial crisis of recent years has seen the rate of convergence between the developing world and the West increasing. While the Eurozone and the US have become locked in a cycle of slow or negative growth, the likes of India, China and Brazil have been relatively unscathed. This shift in economic might is a long-term trend – with huge implications for the purchasing power of hitherto ‘strong’ currencies, sterling included.

5 Threat of protectionism
According to a call to action published by the 11 leaders of international organisations which kicked off the debate at the recent Davos forum, protectionism is one of the top three worries at the start of 2012. The past twelve months have seen evidence of devaluation strategies by leading currencies. Last autumn, for instance, a bill was passed by the US Senate calling for retaliatory action against countries engaging in currency manipulation – a signal of sentiment in the US right now. Importing wine from Australia? The Reserve Bank of Australia stated recently it could move to weaken the Australian dollar if conditions required it. Actions to devalue currencies in wine exporting countries such as Argentina and Chile have also been noted in recent times.
Hedging as an option

Exchange rate fluctuation is a critical issue for UK wine importers. If your business imports or exports wine, a robust currency strategy is a sensible way forward at a time of global uncertainty. Hedging options such as forward contracts can negate the currency risk of doing business abroad. There is a range of options to suit all circumstances and varying levels of attitude to risk.

At Smart Currency, we update our views on the euro/sterling exchange rate on a daily basis. We also produce on a monthly basis our Outlook report which pulls together our thoughts and those of the mainstream banks on where to next for exchange rates. Download your copy now by clicking here http://www.smartcurrencybusiness.com/freeOutlook.aspx or call us on 0207 898 0503to discuss your situation.