Volatile realm of the king dollar

In an industry where the US dollar (USD) is king, foreign exchange (FX) markets can be the difference for many oil and gas firms between staying afloat and going under.

Indeed, it is hard to think of many trades that are defined so greatly by one currency and where one upset apple cart can have such overarching implications.

When you take the upcoming US election, continued Brexit uncertainty and mix it with the ongoing financial turmoil caused by Covid-19, there aren’t many reasons for the sector to be optimistic.

The trade-weighted USD index, which measures the currency relative to its competitors, is currently at its lowest level since May 2018.

That’s despite the Covid-19 pandemic causing it to reach its highest point since 2016 in March this year.

The British pound (GBP) to USD exchange rate also fell to 1.11412, the lowest level since 1985 and the days of Reaganomics.

To put that in context, the 10-year average exchange rate is 1.4665.

The issue is not so much with the USD now falling, but that it’s becoming increasingly difficult for operators to predict when the next spike may occur, if at all.

As Covid-19 forced the world into lockdown, the GBP to USD exchange rate experienced record volatility, falling from 1.3200 to 1.1412 in less than a fortnight.

It has since bounced back and is now trading at around 1.3500, the highest level since the conservatives won a majority in December, causing a spike in GBPUSD.

These events should be a wakeup call to oil and gas firms to identify and fill gaps in their workforce to make sure they’re ahead of the curve.

Having a specialist FX expert on hand to smooth out this volatility and assist in market-timing is key in allowing operators to focus on day-to-day operation rather than trying to be an FX expert. Having a relationship built on trust and proactivity, rather than being left at the mercy of an online platform, is paramount to weathering the FX storm.

Oil and gas companies without an FX specialist may have missed out on the opportunity to not only profit from a stronger USD but, more importantly, be protected from a falling dollar. Their banks, most only offering an online platform, weren’t assisting them and a hedging policy was often not in place.

We’ve moved beyond the USD appreciating as a risk-off play, to it depreciating because of the Covid effect on the US economy. With real interest rate yields collapsing across the pond, investors are now looking to the euro and others as their currency of choice.

Speculation makes up 99% of currency trading – the market is hugely complex and investors are hugely fickle.

Moreover, with everything else going on in the world currently, the uncertainty of an election, especially one that promises to go down to the wire, is unwelcome to say the least.

Ahead of most votes, you can make a rational punt as to who might come out on top and although Joe Biden seems to be edging it in the polls, it’s still all to play for.

Traders and investors don’t appreciate the uncertainty that the spectre of political change generates.

Unpredictability typically spells downside for a currency. You only need to look at the way the pound has reacted to Brexit instability in the past few years. GBUSD was trading at 1.5000 the night before Brexit. You could argue that in the run up to Americans heading to the polls on November 3 the USD will continue to struggle.

We are also moving ever closer to the Brexit deadline of December 31 and we’re yet to see a firm trade deal in place. Again, the closer we get, the more volatility the pound will experience. In Global Reach’s view, there’s a binary outcome for the pound: a deal = up 5-10%, and no deal = down 5-10%.

In our experience at Global Reach, anyone receiving USD income but having non-USD expenses takes the volatility hit and will see their bottom line eroded by currency swings.

But it doesn’t need to be like this. With Global Reach’s help UK oil operators could have hedged the next two years’ revenues at an exchange rate of 1.1500. At today’s rate, the savings would be £3m per annum and if the USD continues to weaken then these savings would increase. We are still well below the average 10-year trading rate of 1.4660, meaning USD sellers should absolutely be looking to hedge against further appreciation in the GBPUSD rate. UK oil and gas operators should focus not only on making the most of the opportunities that will arrive postCovid, but also those that present themselves during the pandemic.

■ If you are concerned about the impact recent volatility is having on your business or how to save money in your M&A activity, Global Reach will help. Contact Daniel Harden on DHarden@globalreachgroup.com or +44 (0)20 3465 8202 for a free, no obligation review of your current FX exposure.