Written by 12:15 pm WTF is going on with the Economy?!

What you need to know about the currency market craziness right now

currency

This is issue 032 of our WTF is going on with the Economy?! Newsletter. Subscribe to get it straight to your inbox. You might have noticed that the currency markets have been nutty lately. 

If you’re a remote worker earning your income in a different currency, you’ve definitely noticed that the exchange rates have been nutty lately. 

So, uh, what gives? 

Let’s take a look.

(First, if you need a quick intro to exchange rates, check out our short explainer article.

It has a cat and dog in a hot tub, plus a clown. 

You probably don’t want to miss it). 

The Safety of the US dollar and a brighter global outlook

The US dollar has long been a haven for scared global investors. 

Back in March, the global economy went straight down the toilet. 

At the time, investors flocked to the greenback, looking for some stability from crashing stock and commodities markets

The dollar soared to some of its highest levels ever against the Euro and British pound. 

As the pandemic continued to play out, investors got a better idea of the global economy’s direction. 

Up until this point, the US central bank was propping up the global economy.

Then, over the summer, it became clear that other major economies worldwide were willing to do what it takes to survive. 

Here, the euro strengthened, and as a result, the dollar weakened to levels last seen in 2018. 

The currency markets remained relatively stable from that point until mid-November.

Then, the nuttiness began.

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A few weeks ago, the dollar began weakening against most major currencies. 

First, there was positive news about three vaccines being effective and ready.

Investors saw this breakthrough as a light at the end of the tunnel. 

They immediately took their dollars and bought British pounds, Japanese yen, Swiss francs, and other currencies to invest globally. 

Second, the US central bank — the Federal Reserve — hinted that it would keep interest rates low for the foreseeable future. 

Lower interest rates mean that bank deposits don’t earn as much as they would elsewhere. 

You see that in your savings account.  

Global investors do, too, and they decided to look for higher-earning opportunities outside of the US. 

These factors are pushing the dollar lower, and, if you would believe the analysts, there’s little end in sight to the drop.

Source: Abroaden Insights.

But are the currency market analysts right? 

Currency markets are predictably unpredictable.  

Seriously. 

There seems to be a consensus among professional FX analysts that the dollar could weaken further. 

But that’s far from set in stone. 

No one can say where an exchange rate will be in two hours, let alone six months from now. 

Remember:  

  • There’s still tons of uncertainty in the global economy.
  • The pandemic is far from over. 
  • Brexit’s finality is unclear, which weighs on the pound, euro, and dollar. 
  • We don’t know what the ECB or other European/global governments will do to support their economies. 
  • The US will probably pass a stimulus, but we don’t know (yet) what that will look like. 

Oh yeah, there’s still the last two Senate seats up for election in January. 

Whichever party wins those seats will determine who controls Congress, and therefore, the Biden administration’s ability to act on the economy.

Additionally, many countries will stop their emergency support and furlough programs in the coming months.

Will that put us back into a recession? 

These moves drive wild swings in FX markets, and they probably won’t stop any time soon. 

What can I do to keep my sanity? 

For many of us living and working abroad, exchange rates are a part of life.

It’s mildly infuriating to watch our actual net income change by the minute, especially when we’re losing money. 

Here’s what you can do to keep calm (and sleep well).

Accept that you can’t control the currency markets.

No one can control currency markets, no matter how hard some people try. 

Instead of trying to time the market or somehow get ahead of it, accept that exchange rates will happen, regardless of what you do. 

By taking the right mentality, you’ll stress less over money. 

An artistic rendition of the US dollar versus major currencies in November

Don’t do something stupid like try to beat the markets through some exotic trading strategy.

We’ve read about people claiming they could get around the exchange rate by initiating some complex global trade sequence. 

Know that:

  1. You can’t. Markets and traders effectively erase “shortcuts” as soon as they appear;
  1. Suppose you’re trying to trade your pounds for euros by exchanging for Canadian dollars, Chilean pesos, South African rand, and Vietnamese dong. In that case, you’re going to wind up with a currency portfolio that looks like a UN security council roll call.  You’re also going to lose tons of money. 

Don’t do it.

Set a plan and sleep better

Build a plan if you’re worried about the rate dropping further. 

Instead of opening the ole browser and Googling the FX rate every three minutes, set a benchmark rate that you know in advance. 

Then, with an alert in place, you can quickly exchange your money if the market hits your rate. 

This way, it’s possible to forecast how much you’ll need to transfer or how much you’d receive when you do the exchange. 

If you absolutely need that money today, then make the transfer – eliminate the uncertainty even if it’s painful.

Losing sleep sucks as it is. Don’t let the exchange rate fuel your insomnia.

Get creative

Finally, if you’re at the mercy of the exchange rate, you could always look to shift some of your expenses into a different currency. 

For example, lots of travel and airline websites accept payment in multiple currencies. 

However, the rates they use aren’t always updated in real-time.

With some creative searching and even a VPN, you could get a significant discount on travel, vacations, subscriptions; you name it. 

Finding these sorts of deals won’t solve your problem, but it can make it better.

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