In the face of political and economic uncertainty, such as the recent attempted assassination of Donald Trump and Joe Biden’s withdrawal from the presidential race, importers and exporters must be prepared for potential volatility in the USD/ZAR exchange rate.

These events can lead to increased market uncertainty, impacting currency values and the cost of doing business. Effective currency risk management tools, such as foreign currency accounts, forward exchange contracts, and market orders, can help mitigate these risks.

In this article, we explore how these tools can be used to navigate the turbulent economic landscape and manage exchange rate volatility in the turbulent times ahead.

Political Uncertainty and Its Impact on the USD/ZAR Exchange Rate

The attempted assassination of Donald Trump and Joe Biden’s withdrawal from the presidential race have created significant political instability in the United States. These events heighten uncertainty in the political landscape, which typically translates to increased volatility in financial markets.

Investors tend to seek safe-haven assets like the USD during times of political turmoil, potentially leading to a stronger USD relative to other currencies, including the ZAR. Though the USD is slowly losing its reputation as a safe-haven currency due to rising debt levels and political turmoil, it is still the preferred currency. We should likely see continued strength in gold prices as it is the only time-tested store of value over thousands of years.

For the purposes of this article, we will focus on the USD. Most importers and exporters trade in USD, even if a transaction does not relate to the USA. Most imports and exports from and to countries other than the USA are conducted in USD. For South African importers and exporters, the cost of goods and profitability can be directly affected by the fluctuating USD/ZAR exchange rate. In such an unpredictable environment, employing effective currency risk management strategies becomes essential.

Currency Risk Management Tools

Foreign Currency Accounts

A foreign currency account allows businesses to hold and transact in foreign currencies. This can be particularly useful for managing currency risk and mitigating the impact of exchange rate fluctuations.

By maintaining a USD account, South African importers can pay for goods in USD without the need to constantly exchange ZAR for USD, thus avoiding unfavourable exchange rates. Exporters can receive payments in USD and hold the funds until the exchange rate is more favourable for conversion to ZAR.  

Forward Exchange Contracts (FECs)

Forward exchange contracts are agreements to exchange a specified amount of currency at a predetermined rate on a future date. This tool helps businesses lock in exchange rates and hedge against future currency fluctuations.

Importers and exporters can use FECs to lock in the current exchange rate for future transactions. This provides certainty about the cost of future payments and receipts and protects against adverse movements in the USD/ZAR exchange rate.

By securing exchange rates in advance, businesses can better predict their cash flows and manage their budgets more effectively, reducing the impact of currency volatility on their operations.

Market Orders

Market orders, including limit orders and stop-loss orders, allow businesses to set specific exchange rate targets for their currency transactions.

A limit order allows businesses to set a target exchange rate at which they want to buy or sell a currency. The transaction is executed automatically when the market reaches the specified rate, which can be useful for taking advantage of favourable exchange rate movements. These orders can be executed after hours, so you are not limited to business hours. If you reach your desired rate in the middle of the night, these orders can be executed.

A stop-loss order sets a minimum exchange rate at which a business is willing to transact. If the market moves unfavourably, the stop-loss order ensures the transaction is executed at the predetermined rate, thus limiting potential losses.

Applying These Tools in Turbulent Times

The recent attempted assassination of Donald Trump and Joe Biden’s withdrawal from the presidential race have added significant uncertainty to the US political environment. As investors react to the instability, these events can lead to sharp movements in the USD/ZAR exchange rate.

• Foreign Currency Accounts: South African businesses can use foreign currency accounts to hold USD, allowing them to avoid immediate conversions and wait for more stable conditions. This is particularly useful when political events cause sudden spikes in the USD’s value.
• Forward Exchange Contracts: Importers anticipating future payments in USD can lock in current rates using FECs, protecting themselves from the risk of further USD appreciation. Exporters can similarly secure favourable rates for their expected receipts, ensuring stable revenue despite potential ZAR depreciation.
• Market Orders: Businesses can set limit orders to capitalise on favourable rate movements amid political uncertainty. For instance, if the USD strengthens significantly due to market reactions to political events, a limit order can ensure that the business buys USD at a more favourable rate. Conversely, stop-loss orders can protect against adverse movements by triggering transactions at predefined levels, thus limiting losses.

Utilising a combination of foreign currency accounts, FECs, and market orders can provide a robust defence against currency volatility. Diversifying risk management strategies ensures businesses are not overly reliant on a single method and can adapt to changing market conditions.

Core Currency Connect is here to assist clients within the Core network who need assistance with currency risk management.  We can help businesses tailor their strategies to their specific needs.

In an environment of heightened political and economic uncertainty, such as the recent events surrounding the US elections, effective currency risk management becomes crucial for South African importers and exporters. By leveraging tools like foreign currency accounts, forward exchange contracts, and market orders, businesses can hedge against volatility in the USD/ZAR exchange rate and protect their financial interests. Staying informed and proactive in managing currency risk will enable businesses to navigate the uncertainties and optimise their financial outcomes in 2024 and beyond.