Financial markets naturally respond to political change, creating challenges during presidential election cycles that require thoughtful analysis and careful preparation. Within these cycles, currency markets demonstrate notable sensitivity to political developments, leading market participants to develop approaches for navigating heightened uncertainty.
How Individuals Can Manage Risk During Election Season
Consider Saving in Different Currencies
A number of hedge funds and financial institutions spread their risk by holding multiple currencies, just like not putting all their eggs in one basket. Opening accounts in different currencies makes sense, and the easiest way to do this would be to use a bank that offers multi-currency accounts. Australian and Canadian dollars tend to stay steady when American politics gets messy, and currency pairs like EUR-USD may be attractive to forex traders. The trick lies in moving money between currencies when the time feels right, not trying to outguess the market.
Plan Trips and Living Costs
Nobody wants their dream vacation ruined by a falling dollar. Smart travelers buy some foreign currencies well ahead of time — especially when elections might shake things up. So, if you plan on travel, it’s essential to make arrangements and payments before the volatility of elections takes effect.
Manage Your Mortgages
Elections make mortgage decisions tricky because no one is entirely certain how the outcomes will impact interest rates. If you’re considering refinancing, it’s advisable to watch the currency markets closely or wait until after the elections.
Looking at property abroad? That’s an even bigger gamble right now. You’re not just betting on house prices — you’re also playing the currency market game. Unless you’ve got deep pockets to ride out the swings, it might be smarter to wait until the dust settles after election day.
Diversify Your Portfolio
During election periods, investment portfolios tend to benefit from looking beyond traditional stocks and bonds. Currency-focused funds present one option, while international mutual funds and ETFs offer exposure to foreign markets without direct currency management.
Gold traditionally serves as a hedge during uncertain periods, though its volatility requires careful consideration. Historical data shows that even experienced investors face challenges when making currency predictions, suggesting the importance of balanced allocation.
How Businesses Can Prepare for Dollar Volatility
1. Strategic Contract Restructuring
The foundation of effective currency risk management lies in how businesses structure their international contracts. Companies need to move beyond basic currency clauses to implement sophisticated pricing mechanisms that automatically adjust for significant currency swings. This approach should include trigger points for renegotiation and clear terms for sharing currency risk between parties.
Forward-thinking businesses are already incorporating currency corridors into their contracts — predetermined ranges within which prices remain stable, with agreed-upon adjustment mechanisms when exchange rates move beyond these boundaries. These arrangements help maintain profitability while keeping relationships with international partners stable and predictable.
2. Smart Money Management
Smart treasury management extends beyond basic hedging to include a sophisticated mix of financial instruments and banking relationships. Accounts departments should maintain relationships with multiple banks across different regions, each offering unique perspectives and solutions for managing currency exposure.
The key is to build account management processes that help quickly access different markets and instruments as needed. This might mean maintaining credit lines in multiple currencies, using a mix of forwards and options for different exposure types, and developing the capability to shift between different hedging strategies as market conditions change quickly.
3. Operating Model Flexibility
Businesses must build currency flexibility into their core operations, not just financial management. This means developing the capability to shift production, sourcing, or sales between different currency zones as exchange rates fluctuate. Companies that succeed in this area typically maintain relationships with suppliers in multiple currency zones and have the logistics capabilities to shift between them quickly.
The most successful companies maintain what might be called “operational redundancy” — the ability to quickly shift operations between different regions without significant disruption to their business. This isn’t just about having backup suppliers; it’s about maintaining active relationships and regular business flows with partners in different currency zones.
4. Data-Driven Risk Assessment
Modern currency risk management requires sophisticated data analytics capabilities. Companies need systems that can track and analyze their currency exposures in real time, including indirect exposures through suppliers and customers. This data needs to feed into dynamic risk assessment models that can quickly evaluate the impact of different election scenarios.
The most effective systems combine internal exposure data with external market intelligence, including political polling data and economic indicators. This allows companies to develop early warning systems for potential currency movements and adjust their strategies accordingly. Successful businesses typically maintain dedicated teams that monitor these indicators and adjust hedging strategies based on changing risk assessments.
5. Liquid Asset Management
Companies need to maintain sufficient liquidity buffers to handle unexpected currency movements, and these buffers must be managed actively to prevent drag on returns. This means maintaining a careful balance between having enough readily available cash to handle currency-related disruptions and employing that cash productively.
Smart businesses are developing sophisticated cash management strategies. These strategies include holding strategic cash reserves in multiple currencies, maintaining liquid investments that can be quickly converted if needed, and having pre-arranged credit facilities that can be accessed quickly in an emergency. The key is maintaining flexibility while minimizing the cost of carrying these buffers.
Final Thoughts
Managing currency risks during presidential elections requires a balanced approach for individuals and businesses. Success during these periods doesn’t depend on predicting election outcomes but on implementing robust risk management strategies that can weather various scenarios.
By Chris Bates
