Managing risk in a volatile FX market

BLOOMBERG PROFESSIONAL APRIL 12, 2016

Companies, traders and investors around the world are

under increasing pressure to find new ways to manage
risks and limit their exposure to major shifts in foreign
currency exchange markets, where some $5.3 trillion of
value is transacted per day, according to Bloomberg
Data.
Ever-greater attention is being paid to the myriad factors
that impact currencies in relation to the dollar, and many
firms are turning to new tools to help.
FX modeling in a changed world
Creating models to predict the paths currencies will take
over a period of weeks, months or years has changed
since the global financial crisis of 2008, according to
speakers at a recent Strong Dollar event at Bloomberg
Headquarters in New York.
Central banks and governments have aimed to
encourage economic growth through the monetary policy
of low interest rates and quantitative easing, and event

participants noted these are not necessarily working as

well as hoped. A low interest rate environment does not
always spur growth when individuals and corporations
economic confidence and financial position are already
heavily damaged.
When it comes to FX trading, the issues that need to be
tracked and considered have evolved. These now have
as much to do with geopolitical events, in developed and
emerging economies, as with decisions made by central
banks, speakers stated at the event.
Also, while opinions in the market vary on whether
emerging market finances are destined to strengthen in
2016, it was argued that their performance and growth
potential ought not be overlooked in any contemporary
FX trading scenario, nor should prospects relating to
commodity prices.
Predictable and unpredictable risks
Those speaking at the event discussed a number of risks
that have the potential to impact foreign exchange
markets to a considerable degree in the coming months:

 The UKs referendum, in June, regarding its

membership of the European Union:Panelists
warned that a Brexit vote could have major
damaging consequences in Europe and beyond.
Renminbi rates, as Chinas economy grows more
slowly than hoped:The opaqueness of the market
and of future policy was highlighted as a concern by
panelists.
Elections in the U.S., Japan and beyond:Panelists
noted the potential to impact how international
currencies behave in relation to the dollar.
Possible rising U.S. interest rates:The recent
release of minutes from the Federal Open Market
Committees meeting in March indicates there is at
least some consideration for this to happen relatively
soon.
A Fast changing political and economic
environment:Damaged market confidence and a
lack of clarity of what will happen next are causing
volatility.
Improving analysis and guarding against volatility

In the coming months, the progress of foreign currency

markets worldwide against the dollar remains highly
unpredictable, and experts on the panel took differing
views on what the latest data means in these contexts.
Most of the panelists leaned towards a bullish outlook on
the dollar, seeing its overall run and the U.S. economic
potential. But the bearish viewpoint was also heard:
Some tough U.S. retail figures outside of autos, and the
Chinese worries could hurt the dollar.
What matters most today for corporations, traders
and investors, is that risks are understood as well as
possible and that currency volatility is well guarded
against.
That imperative is driving interest in index instruments
that help hedge against currency exposure. One
example is the recently-introduced CME Bloomberg
Dollar Spot Index futuresa contract now available for
trading on the CME Globex electronic trading platform.
By representing real trade flows into the US, BDI aims to
measure the worlds top-traded emerging and developed
currencies against the dollar more accurately.

Experts at the Strong Dollar event said there is no

denying that the geopolitical uncertainties require a
smart reaction. In such a world, the right processes,
market access and benchmarking are vital to stability
and success. By having a better understanding of
currency potential and trading with an index dynamically
weighted to current realities, those in the FX derivatives
market stand much more chance of success in a tough
environment.