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Blog - Published on July 06, 2021

How Emerging Market currency volatility hits merchant revenue

Currency volatility can be defined as the frequent and quick movement of exchange rates in the foreign exchange market. Such volatility is a primary driver of foreign currency risk - and if not managed effectively, can ultimately lead to large, unpredictable losses and gains for businesses and an exposed bottom line.

There is no one factor that causes currency volatility, which makes managing it all the more difficult. From socio-political factors to policy changes, from inflation to interest rate changes, from seasonal tourism to natural disasters, or even a global pandemic - the factors are as endless as they are unpredictable.

Lets look at a real life example:

Currency volatility in LATAM is notorious, and the Coronavirus pandemic only amplified this. The below graph details the change in major LATAM currency exchange rates against the US dollar during the period of March - May 2020. Every currency represented was impacted to varying degrees. The Brazilian real experienced the greatest depreciation during this period, losing 15%+ of its value compared to the US dollar.1

So how do you manage the risk?

Understanding foreign exchange volatility can help you navigate this unpredictable market. Putting in place a robust fx strategy can even help you succeed. In this blog we will explore factors to be mindful of and strategies to consider when building your fx strategy.

Leverage expertise

Currency volatility has a major impact on merchant revenues in emerging markets. We have seen currencies like the Argentinian Peso fall as much as 10% in a day. So, a clear fx strategy is essential to maximize revenue and reduce currency exposure. It's important that you work with a provider that has treasury expertise and infrastructure to support emerging market currencies.

Automate and optimize

Once your strategy is set, you need to automate and optimize this as much as possible, or risk having much of your time absorbed by monitoring and executing trades. Running a robust fx strategy relies on effective execution, data, and strong partnerships.

Be careful when going Long

As we've explored, emerging markets can be particularly susceptible to currency volatility. As a general rule, merchants do not want to be long these currencies. In some markets the challenge is the cost of anticipating card funds, as is the case in Brazil and Argentina. That needs to be factored into your risk analysis and fx strategy.

Tourismo rates

Tourismo rates are the foreign exchange rates charged to those visiting a country, these rates are often 4-5% higher than the commercial rates. If you are a merchant looking to expand into a new region, or even looking to optimize your current fx strategy, you need to ensure that you aren't being charged the tourismo rate. If you are, you may be paying more than you need to.

Ultimately, volatility cannot be controlled - but risk can be managed. You can dictate how much risk you are willing to manage with an effective and robust fx strategy. The right provider can help you develop this and ease the burden of having to define, run and optimize this yourself.

At Yapstone, we have a team of treasury experts in local markets ready to help you:

  • Define a well-informed strategy
  • Automate and optimize your fx trades
  • Work with global / local banks to put hedging strategies in place
  • Minimize risk
  • Hold rates

Get in touch by emailing globalscale@yapstone.com to begin building out a strategy that is perfect for you and your business.

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