Volatility is a fact of FX market life that introduces risks. Shrewd businesses have an FX trading strategy that can both prevent losses and take advantage of gains.
Throughout each week, the value of the U.S. dollar is always in flux—from hour to hour and from day to day. Step back a bit, though, and larger trends emerge.
Here’s a recent prominent example. At the start of 2021 the U.S. dollar was trading against the Euro at a two-and-a-half year low: 1 Euro cost $1.23. By the end of March, as the U.S. ramped up its vaccination and the eurozone’s effort got off to a slow start, the dollar had gained in value. A Euro cost $1.17. Since then, we’ve seen something of a repeat of this rate change cycle—a drop and then another rise in value—as divergences have occurred in the pandemic’s intensity and monetary policy on either side of the Atlantic. At the end of July, a Euro cost $1.19.
Markets Are Inherently Risky—and That’s OK
Of course, the U.S. dollar is in constant trading dialogue with many other currencies, and each currency pair has its own exchange rate dynamic and highs and lows. It’s a complex world. As much as investors like predictability and dislike volatility, the latter will always be with us. Expect more of it as more intense and more frequent geopolitical risks disrupt highly interconnected markets and supply chains.
The impulse to seek safe ground and avoid all market volatility is understandable. But in fact, it’s impossible for any market participant to do so. The best strategy, then, is to manage volatility through tried-and-true risk management strategies. The basic idea is to minimize your exposure downside risk while maximizing upside risk.
A proactive risk management strategy can achieve this, protecting your investments from losses while also positioning them for potential gains. All while you do what you do best: run your business.
You’ve Got Options
At Monex, we know that business owners and operators want to manage their risk and stay profitable. It’s a basic premise of our business. That’s why our experts are so well-versed in both currency market trends and risks, and hedging solutions.
Think of hedging like insurance. It’s a crucial way to reduce your losses if something unexpected happens in the FX market that threatens your holdings or makes the global payments landscape more risky. The following hedging strategies can be aligned to your business’ goals and risk appetite:
Forward contracts: By locking in today’s USD exchange rate, these contracts allow profits to be protected from unfavorable market moves in the future.
Market orders. This tool allows you to automatically execute currency transactions when the market hits your target price. It’s available around-the-clock—so purchases happen even if you’re not watching the market.
Spot transactions: These allow you to quickly buy and sell foreign currency around the world to settle invoices.
Multi-currency accounts: These allow you to hold dozens of foreign currencies in one account. That means that if the U.S. dollar exchange rate is unfavorable when you receive a payment in foreign currency, you can wait to convert it when rates improve.
Remember: The value of the U.S. dollars will inevitably cycle through highs and lows. That’s the reality of currency markets and our highly dynamic global economic system. Monex is here to help protect your business from risks, so it can move through FX market flux stress-free and unscathed.
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