Navigating FX Volatility in 2024: Policy Divergence, Hedging Strategies, The Role of Tech & AI

December 13, 2023 | 
IDG Insights

Jeffrey Blanco, Managing Director of Foreign Exchange at Canaccord Genuity engages in an insightful discussion with IDG’s Diana Aquino. Jeffrey discusses the anticipated surge in FX volatility in 2024, the significance of currency hedging for businesses’ profitability, and the transformative influence of technology on foreign exchange practices.



What are the key factors contributing to the anticipated rise in foreign exchange (FX) volatility in 2024, and how might global economic policies and commodity market fragmentation play a role in this forecasted scenario?

We are at the end of an aggressive rate hike cycle by global central banks amounting to 10 rate increases across major economies in the past year and a half. Now that inflation pressures appear to be subsiding globally, there will be periods of policy divergence as the central banks battle inflation and economic weakness in their home economies. The move to hike rates to reduce inflation has had the impact of cooling economies, and the market will look to relative rates of growth and interest rates for direction in the foreign exchange markets. We anticipate greater FX volatility in 2024 as these policy divergences emerge.

Moreover, commodity markets have become fragmented due to geopolitical factors, leading to uneven economic impact across countries. This ongoing fragmentation is expected to contribute to FX volatility in 2024.

In essence, concerns loom large due to the high level of interest rates impacting high global debt levels, divergent inflation and growth expectations across major economies, and a volatile commodity market.  As noted, this will most likely resolve itself in higher FX volatility, as there is very little room for policy error.


Why is it crucial for businesses to develop a currency hedging plan, especially in light of the potential impact of currency volatility on overall profitability and the anticipated high volatility in 2024?

With profit margins of the average non-financial business averaging around 9%, and average currency volatility of 5-15% (depending on the year and currency), the potential for adverse currency movements to impact the overall profitability of the average business is high. FX risk is normally an inherited risk, as you do not invest in or sell to foreign countries to get currency exposure.  Currency exposure is something that is a result of your business activities. As such, it makes sense to mitigate that risk.

As noted, the potential for currency volatility in 2024 is high, increasing the importance of a well thought out currency hedging plan.


How has technology transformed foreign exchange practices, benefiting hedging clients, and what role might AI play in further enhancing these advancements across industries?

The advancement of technology in the world of foreign exchange has resulted in many benefits to the hedging client. The improvements in price transparency, communication, and increase in the speed of execution and trade automation, has been a benefit to all. Artificial intelligence is likely to impact this further as this technology is developed and rolled out across industries.

Electronic trading platforms have made the job of a company finance or treasury professional much easier in the pursuit of risk mitigation.



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