increasing volatility in the FX markets.
Key Quotes
“Higher currency volatility will increase both the riskiness and the cost of crossborder transactions, whether it is trade in goods or capital flows”.
“This will be the main channel through which it will impact global economy and asset prices: Higher FX volatility will lead to higher FX hedging cost”.
“This means an increase in FX volatility could have a significant negative impact on the profit margin of exporters. This is on top of any negative currency translation effect associated with the appreciation of the home currency”.
“Higher FX hedging cost may lead companies to focus more on their home market at the expense of international markets. This means a sustained increase in FX volatility could have a dampening effect on global trade growth”.
“Higher FX volatility will discourage FDI flows. Higher FX volatility will strengthen the home bias for internationally mobile capital. This means, all else being equal, the cost of capital faced by current account deficit countries will go up”.
“Higher FX volatility makes carry trades less attractive. This means high yielding currencies will do less well in the new high FX volatility regime”.
“The bottom-line: a weak currency might provide a short-term boost to the countries engaging in currency devaluation. However, if everyone is playing the same game, all we will end up with is more and higher FX volatility. This in turn will likely exact a toll on global trade and capital flows”.
Key Quotes
“Higher currency volatility will increase both the riskiness and the cost of crossborder transactions, whether it is trade in goods or capital flows”.
“This will be the main channel through which it will impact global economy and asset prices: Higher FX volatility will lead to higher FX hedging cost”.
“This means an increase in FX volatility could have a significant negative impact on the profit margin of exporters. This is on top of any negative currency translation effect associated with the appreciation of the home currency”.
“Higher FX hedging cost may lead companies to focus more on their home market at the expense of international markets. This means a sustained increase in FX volatility could have a dampening effect on global trade growth”.
“Higher FX volatility will discourage FDI flows. Higher FX volatility will strengthen the home bias for internationally mobile capital. This means, all else being equal, the cost of capital faced by current account deficit countries will go up”.
“Higher FX volatility makes carry trades less attractive. This means high yielding currencies will do less well in the new high FX volatility regime”.
“The bottom-line: a weak currency might provide a short-term boost to the countries engaging in currency devaluation. However, if everyone is playing the same game, all we will end up with is more and higher FX volatility. This in turn will likely exact a toll on global trade and capital flows”.
