After a surprise outcome, the prospects for the US dollar are suddenly looking a lot brighter—thanks in part to the new administration’s more protectionist attitudes towards the American economy. For multinational companies with dollar-denominated cash flows, a stronger US currency could change the way payables and receivables are handled. With this in mind, we’ve analysed how post-election FX issues could affect corporate payments and transfers in the months ahead.
In a stunning turn of events that very few predicted, Donald J. Trump captured the US presidency last week, sending financial markets into a tailspin at first—followed by a steep rally. The markets’ general enthusiasm appears to have continued into this week as investors warm to the likelihood that a more conservative administration would enact trade policies that favor the US economy. Indeed, this was a central theme of the Trump campaign, and his victory ensures that at least some pro-US policy interventions will become realty in the months and years ahead.
One of the most pronounced effects of Trump’s election has been in the FX market. The US dollar has logged significant gains against many of the world’s developed and emerging market currencies, with major US trade partners like Mexico, Canada and China seeing the greatest impact. The Mexican peso, in particular, saw its largest one-day drop (13%) against the dollar since its sudden devaluation in the “Tequila Crisis” of 1994.
Like Brexit, Trump’s victory is being viewed by some as a resurgence of protectionist trade policies. Still, it is unlikely that the march of global trade will slow very significantly as a result of these events. Companies with international cash flows should take note: a stronger US dollar can both help and hurt the bottom line, depending on the nature of the transaction and currencies involved.
1. Do your research to get a competitive payments provider
Especially in the payments and transfers industry, where any and all portions of a cash flow are vulnerable to exchange rate fluctuations, financial professionals need access to FX rates in near real-time. It is becoming increasingly important for companies to research available options beyond those offered to them by traditional payments providers (i.e. banks and other financial institutions). Increasingly, those alternative providers are furnishing companies with sophisticated technologies and analytics that allow them to track and measure the success of the currency conversion process.
2. Utilize hedging strategies and forward contracts
Companies looking to offset the impact of a stronger US dollar on their cash flows can also look to hedging strategies, which are becoming more popular among corporate finance departments in light of ongoing currency volatility. Forward contracts, for example are a common method that smaller and mid-size companies can mimic the more sophisticated hedging practices employed by larger companies.
While a boon for the dollar, Trump’s victory was just another unexpected turn in an already volatile year. For those involved in moving money across borders, the risks associated with sudden currency rate movements are unlikely to subside in the coming year, even as such black swan events become more the norm.