Low inflation and interest rates over an extended period have dampened sharp movements in exchange rates, but as consumer prices rise and interest rates rise, currency volatility once again becomes an important element to consider when negotiating. If it is underestimated, it could have potentially negative consequences for some investors.
Currency volatility is generally measured by calculating the standard variation of currency price movements and provides traders with an indication of the extent to which a currency could move relative to its average over a given period. Generally, the more volatile a currency is, the greater the trading risk. However, this higher volatility also creates more opportunities for traders with its consequent larger price movements.
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The rand and the dollar are among the most volatile currency pairs
It is important for traders to be familiar with the volatility of a currency, as different levels of volatility are best suited for specific strategies and psychologies. Lower volatility currency pairs are more favorable for those who want to grow capital steadily without taking significant risks, while higher volatility currency pairs are more likely to be sought after by risk-hungry traders looking to profit. higher price differentials.
The US dollar (US) and the rand are considered among the most volatile currency pairs. The rand is a commodity-driven currency, the value of which fluctuates according to supply and demand. Despite falling short of the average daily currency turnover of major currencies such as the dollar, euro, or British pound, the value of the rand still ranks it as one of the top 20 world currencies.
By effectively addressing the variables that affect volatility, risk management strategies must be tailored to the individual requirements of each client.
Political, economic and social circumstances drive volatility
Volatility is affected by various political, economic and social circumstances and events. Both the local and political environment have a direct influence on the volatility of a currency, which is one of the reasons that emerging market currencies tend to be more volatile due to uncertain or unstable political and social scenarios.
“Central bank policies are another factor. Local interest rate hikes are seen as positive to the rand, while interest rate cuts are seen as negative. International interest rates also affect the attractiveness of investments denominated in rand, in bonds, for example. An obvious element influencing volatility is local and international economic performance and an excellent example of this is the instability surrounding the reliability of South Africa’s power supply, which is currently having a negative impact.
Seeking opportunities against your appetite for risk
Volatility is often viewed as negative, as it demonstrates how susceptible the rand is to specific events and market changes, but it also demonstrates the efficiency and liquidity of the South African market, where buyers and sellers can buy and sell currencies without delay, what many traders take advantage of.
Although currency volatility can be seen as unpredictable, the associated risk is not and individuals and companies must decide the extent of risk they are willing and able to manage. Individuals and companies with currency exposure can hedge against volatility by using various measures to strengthen their position in the market, one of which is hedging solutions.
Associated risks must be identified and appropriate strategies, solutions and products designed to manage them. Risk can then be mitigated through market timing, effective strategies, preferred vendors, and efficient reporting, allowing clients to adjust business strategies and policies to suit their risk appetite and business style.
As a leader in treasury, currency exchange and risk management solutions, Citadel Global recognizes that risk management is not just about avoiding the loss of rands and pennies, it is about understanding the opportunity cost and regulatory requirements involved in every transaction to be able to move. money efficiently. To do this, my team and I are always aware of local and international news that could have economic repercussions and we monitor international markets in a comprehensive manner.
Bianca Botes is the Director of Currency Experts at Citadel Global.