Home » World Events And Currency: Why Politics Affect An Exchange Rate

World Events And Currency: Why Politics Affect An Exchange Rate

Have you ever wondered why the pound fell after the UK Brexit referendum or snap election? Considered why you get more euros for your money when there’s an uprising of populist parties in the currency bloc? Or found that your dream home abroad was cheaper one month when there was some political uncertainty in your chosen country? Political unrest is tricky as no one can predict what might happen to a country. If you’re living in the UK, headlines claiming the pound has fallen or risen on Brexit developments are commonplace, whereas if you’re based elsewhere you might find developments in Europe or geopolitical tensions with North Korea might impact your domestic currency and the one you want to buy.Politics can play a huge part in how your exchange rate fares and if you’re new to the market or have questions regarding factors that might impact your exchange rate, this article is designed to be a good starting point, so you have a bit more knowledge on the topic.

UK – Brexit's Impact On The UK And GBP

Brexit is the big one – in the aftermath of the EU referendum in 2016 the pound dropped spectacularly, shedding around 20% of its value. This is a massive shift in the currency market and not something seen very often. Sterling’s tumble came because markets shy away from uncertainty and suddenly the UK was plunged into the world of the unknown. Questions arose from every direction; will the UK remain in the Single Market? Would Britons experience a hard or soft Brexit? What would a no deal mean for UK businesses? What economic impact would Brexit have?

Although negotiations are still ongoing and seemingly little progress has been made, there’s more direction as to how the UK will proceed when it leaves; for instance, the UK will leave the Single Market. However, the result of the monumental vote has had a significant impact on the economy already, and Britain hasn’t even left yet. As the prospect of leaving the EU edges ever closer without a huge amount of guidance from the government, businesses are making decisions to set up headquarters in European countries as confidence wanes. When confidence stumbles, it results in less consumer spending, less property purchases, and less economic growth. Additionally, the Bank of England (BoE) has been forced to increase interest rates for the first time in 10 years as inflation has jumped in response to the pound falling. A weaker sterling means that prices of food and other goods and services has become more expensive, and in an economy where wage growth is struggling to improve, these negative pieces of economic data don’t do any favours for the pound.

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The political climate plays an important role in currency fluctuations

Since the Brexit referendum, the UK has faced a disastrous snap election which only worsened Prime Minister Theresa May’s negotiating position. Additionally, with rumours that many may plan a coup against her reaching the papers on a regular basis, the pound has plenty of opportunity to swing on political developments and uncertainty. Sterling has recovered somewhat against other currency majors, and has been reaching highs against a basket of currencies recently as the prospect of a divorce settlement and the progression to trade talks circulates the market.

USA – President Trump And North Korea

When Trump won the US election it shook markets and the US dollar experienced losses as a result. As the outcome hit markets and news headlines printed, analysts suggested the long-term effect of Trump’s victory could be worse than the UK’s Brexit decision. The greenback started to fall as soon as signs indicated that the Republican was on a victorious trajectory. Gold prices jumped by around 5% after Trump’s win as investors headed for safe-haven assets.

However, Trump promised big things, such as massive tax reforms, major infrastructure spending, the doubling of economic growth to 4.0%, and the creation of 25 million jobs in 10 years. Markets digested the news and the week after the election the US dollar reached its highest level in almost a year. Nowadays, the US dollar fluctuates when Trump’s plans don’t come to light, when investigations into his Russian involvement during the election hit headlines, and when tensions heat up between the US and North Korea.

North Korea has been somewhat of a loose cannon of late and this can push markets to enter risk-off mode. Global tensions can impact lots of currencies, for instance, if risk-off mode grips markets, commodity currencies such as the Australian and New Zealand dollars which are seen as riskier investments, can take the brunt. The Japanese Yen, which is usually regarded as a safe-haven currency can even fall as things with North Korea heat up; ballistic missiles flying over Japan potentially put it at risk.

Eurozone – The Rise Of The Far Right

However, it seems Brexit and Trump were the start of political change as populist parties have been popping up all over Europe. This year saw a few important elections take place following the Brexit vote, and there’s been plenty of speculation as to whether a political change could sweep the currency bloc, creating dramatic euro movements.

One of the biggest concerns this year was the French election. Controversial Marine Le Pen was performing well in the polls and made it through to the second round of elections. Marine Le Pen wanted to pull France out of the Eurozone and the risk of a ‘Frexit’ was enough to see investors sell-off the euro. When Marine Le Pen’s political party the National Front lost, the euro recovered as it seemed that France would be in the more stable hands of Emmanuel Macron.

Brexit has had a significant impact on Stirling

Meanwhile, the Netherlands also experienced a vast amount of political uncertainty when far-right Geert Wilders looked to be in with a shot of winning the election. Similar to Le Pen, Wilders is anti-EU and wanted to limit immigration, as well as being anti-Islam. Around the time of the vote, investors shied away from the uncertainty for fear a ‘Nexit’ could occur.

There are other rumblings too – Germany’s recent election saw a surprise rise of the right-wing and Angela Merkel’s party’s popularity was dented. The euro has dropped since coalition talks collapsed, but gained again once it seemed that a coalition might still be possible, rather than another election.

Meanwhile in Italy the self-declared Italian fascist party, Casa Pound, has announced its ambitions to succeed where the National Front couldn’t. The party has so far secured 9% of the vote in the Rome poll. A spokeswoman for Casa Pound and a former model Nina Moric has said: ‘We need to get to where Le Pen didn’t manage to get to, we need to leave the euro, which is slowly killing Europe, not just Italy. Fascism in Italy left behind so many positive things, otherwise Mussolini would not still have so many admirers.’

When a new political party comes into power they bring changes with them. These changes can impact the economy significantly, create disruptions to a central bank’s monetary policy path, and these factors can impact a currency’s value.

Trans-Tasman: New Zealand Elections

The recent New Zealand elections saw the Kiwi dollar slip by around 6.0% as the Labour party took over in a change of government for the first time since 2008. Leader Jacinda Ardern turned the Labour party around in a matter of months to successfully win the top spot and take the title of the youngest female leader to be at the helm of New Zealand.

However, there have been reports that Ardern will make the Reserve Bank of New Zealand’s (RBNZ) job trickier, with the potential to make the central bank responsible for inflation and employment in a move that may impact its monetary policy trajectory. Investors like the higher yielding New Zealand Dollar with the higher levels of interest in the nation, but any interference from the government could see sentiment ebb.

Elections in New Zealand have affected the country's currency

On the topic of a central bank shakeup and employment, New Zealand Finance Minister Grant Robertson has said: ‘We want every part of the economic architecture to be playing its role. That includes the central bank. I’m not naïve to think they have some magical ability to do that, but we want them to be putting employment, employment outcomes, and the overall wellbeing of New Zealanders right up there.’

Robertson has also planned to add an extension onto the Reserve Bank of New Zealand’s policy committee, placing three external members into the mix. However, this could create further exchange rate volatility with external members speaking on the topic of monetary policy, and RBNZ Acting Governor Grant Spencer has stated that this could create ‘a bit of a circus’.

How to Move Money Amid Political Situations

Whether you’re in the UK and moving money to the US amid Brexit developments and North Korean tensions, in New Zealand and coping with a weakened currency, or living in Europe and are wondering when the best time to transfer could be, speaking to an industry expert can help you make the most of your funds. A broker offers you a dedicated point of contact who can tailor a transfer that’s just right for your needs.

Lock In a Rate

Those people that locked in an exchange rate ahead of the Brexit referendum or UK snap election were very pleased they had as it saved them a lot of money. Imagine a transfer of £300,000 into euros (GBP/EUR) before the election when the exchange rate was trending at around 1.31, just a month before. Locking in an exchange rate at that point could have seen them receive a figure in the region of €393,000. Meanwhile, a month after the referendum they might have received a rate of 1.16, equating to around €348,000 on a transfer of around £300,000. That’s a massive difference of €45,000 as a result of politics and uncertainity.

Speak To An Expert

If you’re looking at locking in an exchange rate, you’ll need to speak to an industry expert like a currency broker. With FC Exchange you’ll be assigned a dedicated currency specialist who can keep you up to date with market movements and offer market insight into the most opportune moments to make your transfer. So whether you’ve made a transfer before or you’re completely new to the market, you’ll have an exchange rate expert right by your side.

Stop Loss Contracts

There are other ways to manage your funds that your dealer can discuss with you, such as a stop loss contract. It means that if you have an idea of the lowest exchange rate you’d like to transfer at, you can set up an automatic trade should the market get chaotic and a currency pair drops. For instance, if you’d have set a stop loss contract up before the Brexit referendum, as the pound was tanking, your broker would have automatically made your transfer at your chosen level, so you didn’t experience any further losses.

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