When it comes to factors that impact global currency rates, political influence sits pretty high on the list of contributors.
In fact, political events are actually one of the very biggest influences on foreign exchange, with the ability to transform currency value in an instant.
So, how and why does politics impact currency rates – and how do you protect yourself against this?
Political Factors That Influence Currency
A currency value is influenced by much more than just interest rates and inflation, and even the savviest of financial experts can find themselves caught off-guard when it comes to political influence on a currency.
As such, knowing how politics works in relation to foreign exchange can be a helpful insight to have. To help get you started, here are a few of the most common political factors that influence currency rates.
A country that is at low risk of political unrest poses a far more attractive proposition to foreign investors. As a result, political stability can have a dramatic effect on currency rates. Protests and serious inquiries into government conduct can destabilise the economy and weaken the currency.
Despite the fact that they occur in virtually every country across the globe, an election can have an impact on currency value as they too can be perceived as a sign of impending political uncertainty. Tightly contested elections with candidates with wildly different economic policies can cause a great deal of uncertainty for investors from overseas. As these events are foreseeable, a lot of businesses set up forward contracts if they think that the election result could hurt the value of relevant currencies.
While substantial national spending is a necessary evil in the pursuit of funding economy stimulating projects and government activities, large public debt can act as a deterrent to foreign investment.
If a country gets itself into sizeable national debt without a realistic plan on how to handle it, the risk of defaulting is high and can negatively affect the value of its currency, thus impacting the exchange rate.
In its most basic form, terms of trade highlight the relationship between import costs and export price, related to the country’s current account and balance of payments.
Political conflict and war can be devastating to a country in a myriad of ways and the economy is far from exempt.
In the event of a disease spreading across borders, the impact to the economy and currency rates would be huge, particularly if the spread was serious enough for industries to shut down and lockdowns were imposed, should that be the political decision to do so.
Not All Doom and Gloom
It’s worth noting that, even in the event of a political issue causing a currency decline, the chances of that decline remaining in its depreciated state are unlikely. In currency timing is key, and expert guidance is a great way to protect your business or make sure that your foreign payments are made at a time that maximises value. Risk management tools are designed o offer layers of protection against political events.