If you’re running a small business, and you intend to sell and ship packages overseas, then you’ll need to think about how you’re going to trade with foreign currency. This activity, while necessary, often introduces a degree of risk. So, how can this risk be mitigated?
Emerging-market currencies with weak reserves
Smaller, less well-established economies can often be more unstable. This means that their currencies can be more volatile, that they have shallower reserves, and that they’re at greater risk of suffering an external shock. This might stem from natural events, or from political upheaval. If you’re shipping into these territories, or they feature in your supply chain, then you’ll need to think about how your risk management strategy might account for this.
Companies offering money transfer for business often include built-in safeguards and protections that will keep you covered.
Currencies influenced by political instability or trade sanctions
Sometimes, political events can cause some countries to impose sanctions on others. For example, the Russian invasion of Ukraine in 2022 caused the Russian economy to come under economic siege, which disrupted all trade between it and outside businesses. This prompted a sudden dip, and then a surge, in the value of the ruble. Events of this kind often generate this sort of disruption – though since the events in question can be difficult to predict, the best way to guard against them is by spreading the risk across many different currencies.
Currencies of major trading partners experiencing inflation/interest-rate divergence
Often, the causes of currency issues are more subtle. When currency markets expect a central bank to set rates in a certain way, and then those expectations are violated, the result can be a readjustment of the currency in question. For example, if you’re shipping from the UK to external markets, a sudden downward swing in the value of sterling might result in your products becoming more competitive.
Currency corridors exposed by freight-tariff or shipping-industry shocks
Shipping goods around the world involves making use of a vast and interconnected shipping industry. This industry, like the markets it connects, is vulnerable to shocks. Port closures and blockages, like the Suez Canal blockage of 2021, as well as tariffs, can translate to currency risk in nations that are affected by these events.
“Safe-haven” currencies that may rapidly reverse in crisis
Certain currencies enjoy a reputation as a ‘safe haven’. These tend to be more resilient to shocks, often because the nation or central bank attached to them takes deliberate steps to avoid disruption. But these currencies, too, can behave unpredictably when a shock is widespread. As such, the riskiest thing, in many cases, is believing that a currency is entirely risk-free.