by Stephen McPhie, CA
Partner, RSD Solutions Inc
If currency exchange rates have been volatile over the last few years, we are possibly looking at volatility squared over the next few years. Portugal is joining Greece and Ireland in being bailed out. These economies are relatively very small in the Eurozone. However, many are wondering if Spain and then Italy will be in the cross hairs next and these are not small in the scheme of things. Certainly Spain looks much better in many ways than Portugal but an employment rate in excess of 20% is a massive burden.
Having been an observer and sometimes a victim of several economic cycles, I know that events, markets and politics can gain an unstoppable negative momentum. Prices and rates tend to overshoot their proper level and correct, usually with little disruption on a macro scale. However if a giant wrecking ball overshoots, it can knock down several buildings and that is a whole lot more difficult to correct.
Add to this the increasing number of voices expressing doubt over the whole future of the Euro itself, especially in the 2 large triple A rated Eurozone economies of Germany and France. Especially so in Germany where more and more people are disquieted over the prospect of paying a high price to prop up much less developed Eurozone countries in order to save the Euro.
The Euro itself was a political creation. It was weakened in its earlier days by Germany and France ignoring the fiscal rules. Politicians are trying hard to ensure survival of the Euro. For now, that is. However, politicians do not always operate in a long term economically optimal way. After all, politicians’ careers depend on voters in their own country at the next election and not on wider Eurozone’s economics. Political winds can change direction very quickly.
All this suggests increasing exchange rate volatility. While it does not appear likely that the Euro will die in the near term, there is a giant wrecking ball swinging around that has the ability to knock down a few houses.
Do you really have a handle on your company’s FX exposures? Do you know the natural hedges and economics of your derivative hedges? Have you done a full and proper evaluation of all this? I have seen many companies that are comfortable with their positions until that giant wrecking ball comes crashing through the wall.
No comments:
Post a Comment