Are you ready for 2021? - The ultimate guide for companies navigating currency volatility and scenario planning - Financial Director

Page created by Lori Rodriguez
 
CONTINUE READING
Are you ready for 2021? - The ultimate guide for companies navigating currency volatility and scenario planning - Financial Director
Are you ready
for 2021?
The ultimate guide for companies navigating
currency volatility and scenario planning.
Are you ready for 2021? - The ultimate guide for companies navigating currency volatility and scenario planning - Financial Director
Contents

     SECTION 1                                       4                  SECTION 2                                   7               SECTION 3                          16                  SECTION 4                                        21

Global outlook                                                      Market themes                                                FX forecasts                                         Risk management
Key global events calendar. . . . . . . . . . . .5                  The COVID recovery disconnect . . . . . . 8                  GBP / USD   The dollar’s rise and fall . . . . 17    Protecting profits post-crisis . . . . . . . . . 22

The big picture . . . . . . . . . . . . . . . . . . . . . . . . 6   New ‘lower for longer’ paradigm?. . . . 9                    GBP / EUR   The revival of the Euro . . . . . . 18   Considerations . . . . . . . . . . . . . . . . . . . . . . . .23

                                                                    Today's global trade is not like 2008 . . 10                 GBP / AUD   Restored appetite for Aussie 19          Contact us . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

                                                                    Transatlantic battle for dominance . . 11                    EUR / USD   A durable uptrend? . . . . . . . . 20    About us . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

                                                                    UK trade facing pivotal year . . . . . . . . . 12

                                                                    Try and isolate China . . . . . . . . . . . . . . . . . 13

                                                                    CEE growth model to transform? . . . . . 14

                                                                    EM currencies backed by yield . . . . . . . 15
Are you ready for 2021? - The ultimate guide for companies navigating currency volatility and scenario planning - Financial Director
Foreword
Contents

                  The rise of geopolitical themes such as trade                         As companies now transition into the ‘new normal’
Global outlook

                  wars, and the growing influence of political                          and re-structure plans for 2021, the risks to financial
                                                                                        objectives from economic and currency fluctuations
                  figures on financial markets, has significantly
                                                                                        remain acute. Yet future scenario testing and
                  increased the complexity around judging                               subsequent risk analysis remains an incredible
                  future market trends and their implications                           challenge for many companies, especially SMEs.
                  for international business. COVID-19,                                 For importers that rely on sourcing from abroad or
Market themes

                  however, brought a whole new dimension                                exporters of services, swings in currencies can make or
                  to global markets.                                                    break profits. Despite this, numerous studies, including
                                                                                        our FX Barometer Report, continue to uncover that
                  The pandemic has triggered a broad and rapid                          companies from manufacturers to charities still do not
                  disruption to economies, business operations,                         fully understand or have the resources to sufficiently
                  technology and infrastructure worldwide. Regardless of                hedge this risk and protect profits. Better access            Andrew Summerill
                  size or sector, business leaders have had to respond to               to technology, information and expertise are still
FX forecasts

                                                                                                                                                      President, Payments
                  the "Great Lockdown" crisis at an unprecedented scale,                needed here.                                                  at Western Union
                  whilst dealing with levels of sales uncertainty, currency             In this report – the latest edition of our annual guide for
                  volatility, and cash flow risks previously unseen.                    companies navigating volatility and scenario planning,
                  Exchange rate volatility particularly will be brought into            we uncover the key market trends and events set to
                  the forefront as we look ahead towards 2021, given it                 reshape financial markets and currencies.
Risk management

                  has a vast impact on the profitability of international               We hope it continues to deliver on our commitment to
                  trade in goods and services.                                          provide decision-makers better access to information,
                  To better appreciate this shift in dynamic, one index                 enabling for more substantial strategy development,
                  measure of economic policy uncertainty showed that                    and thus producing better financial outcomes.
                  index levels in August 2020 were 52% higher when
                  compared to this time last year.1 Furthermore, measures
                  of anticipated currency volatility rose from record lows
Contact us

                  in January to an 8-year high by March and remain
                  elevated.2

                  1. Economic Policy Uncertainty Index. Source: policyuncertainty.com
                  2. Global FX Volatility Index. Source: JP Morgan, August 2020                                                                                             3
Are you ready for 2021? - The ultimate guide for companies navigating currency volatility and scenario planning - Financial Director
Contact us   Risk management   FX forecasts   Market themes   Global outlook   Contents

                                                                               SECTION 1

                                                              Global outlook
Key global events calendar
Contents

                  The key political dates and economic projections below represent important flash points and illustrate the inherent complexity of currency markets.
                  Yet there are also several ongoing and over-arching global themes that will reshape market trends and drive currency volatility, such as:
Global outlook

                     US-China trade relations                    COVID-19 vaccine development                     Zero interest rate monetary policy

                                                           2020                                                                                          2021
Market themes

                            OCTOBER                      NOVEMBER                     DECEMBER                           JANUARY                          MARCH (1)                  MARCH (2)

                   European Council Summit       US presidential election     End of the transition period    Inauguration of the US president        UK Budget                US Federal Reserve
                   A key check point on Brexit   On Nov 03, Donald Trump      On Dec 31 the UK will exit      New president sworn in on Jan 20.       UK Chancellor to         & European Central
                                                                                                                                                                               Bank meetings
FX forecasts

                   negotiations and the EU's     faces off against Democrat   the EU customs area. Will       How will either Trump or Biden          lay out new plan for
                   economic recovery.            contender Joe Biden.         a trade deal be in place?       impact the US recovery?                 government spending.     New policy and
                                                                                                                                                                               economic projections.

                                                                                                           2021
Risk management

                              APRIL                          MAY                          JUNE                     JULY – AUGUST                      SEPTEMBER                     OCTOBER

                   Release of Q1 GDP /           Local UK elections &         US Federal Reserve &            Release of Q2 GDP & FED’s          US Federal Reserve &        National German &
                   IMF spring outlook            Bank of England meeting      European Central Bank           Jackson Hole symposium             European Central Bank       Japan elections
                   Initial Q1 GDP estimates      Local votes to depict        meetings                        Initial Q2 GDP estimates           meetings                    Potential change of
Contact us

                   released / New global         national mood amidst         New policy and                  released / Annual US               New policy and              government in both countries.
                   growth forecasts from IMF.    COVID / New BOE              economic projections.           central bank conference            economic projections.       The German chancellor to
                                                 economic forecasts.                                          in late August.                                                retire after four terms.

                                                                                                                                                                                                       5
The big picture
Contents

                  It’s always challenging to analyse every     perspective, $15 trillion is nearly 20%                     THEME 1                                              THEME 5
                  single emerging trend impacting an $87       of world GDP.
                  trillion global market; however, when                                                                    The COVID recovery                                   UK trade facing
Global outlook

                                                               This is what will make 2021 especially

                                                                                                           ECO N O M Y
                  you look at the bigger picture today,        unique, as this gigantic amount of                          disconnect                                           pivotal year
                  it’s clear to any observer what is the

                                                                                                                                                               B R E XIT
                                                               stimulus and our emergence from the
                  major macro driving force leading our                                                                    The global economy is recovering,                    If there was no Brexit, COVID-19
                                                               Great Lockdown will come at a time
                  transition into 2021.                                                                                    but there’s a disconnect that’s                      could have actually helped
                                                               when many other major themes will
                                                                                                                           unsettling.                                          tighten UK-EU trade relations.
                  The world is still living through and        reach a critical inflection point.
                  recovering from its most severe              Money-printing 2.0 and a lower bound
                  economic downturn in modern history.         of zero interest rate policies take
Market themes

                  Amidst the Great Lockdown, more than         central banks into an unprecedented                         THEME 2                                              THEME 6
                  90% of countries could experience an         new monetary era. These
                  annual economic contraction, while           unconventional policies, designed                           New ‘lower for longer’                               Try and isolate China
                  emerging markets collectively are at         to save livelihoods, will influence                         paradigm?
                  risk of recording their first year without                                                                                                                    Facing an economic and politic

                                                                                                           POLICY
                                                               sentiment ahead of major geopolitical

                                                                                                                                                               CH I N A
                  growth in at least 60 years.                                                                             Counter-COVID polices have                           backlash, China will face a year
                                                               outcomes ahead such as Brexit and
                                                                                                                           taken the world into a new                           ahead like no other.
                  The timing of the post-pandemic              German elections.
                                                                                                                           monetary era.
                  economic recovery remains highly             Global trade, which lost considerable
FX forecasts

                  uncertain and reliance on a vaccine          momentum under the weight of US-
                  gives the recovery a more binary             China trade wars will be another major
                  character which materially polarises         driving force for economic and currency                     THEME 3                                              THEME 7
                  any 2021 forecasts. There is hope, and       volatility. US elections – a multifaceted
                  $15 trillion of it too – that’s the total    catalyst we’ll cover in another special                     Today's global trade                                 CEE growth model
                  estimated amount of both injected and        report – alongside the acceleration                         is not like 2008                                     to transform?
                  pledged stimulus from the G10 group          of ‘China + 1’ trade strategies will also
Risk management

                                                                                                           TR A D E
                  plus China since the crisis erupted. For     impact the way markets will evolve.                         Joe Biden’s $700bn “Buy American”                    The region could eventually
                                                                                                                           plan could further accelerate the                    establish itself as a frontier

                                                                                                                                                               CEE
                                                                                                                           shift in world trade.                                market in digital transformation.

                       2021 will be especially unique. Our                                                                 THEME 4                                              THEME 8

                       unpredictable emergence from the                                                                    Transatlantic battle                                 EM currencies
                       Great Lockdown will come at a time

                                                                                                                                                               E M E RG I N G
Contact us

                                                                                                                           for dominance                                        backed by yield
                                                                                                           P O L ITI C S

                       when many other major global themes
                                                                                      Nawaz Ali                            US-EU post-pandemic growth                           EM markets are currently
                       will reach a critical inflection point.                        Head of Insights                     differentials could overhaul                         offering a ‘20 times higher’
                                                                                                                           the balance of power.                                rate advantage.

                                                                                                                                                                                                                    6
Contact us   Risk management   FX forecasts   Market themes   Global outlook   Contents

                                                                               SECTION 2

                                                              Market themes
TH EME 1

                  The COVID recovery disconnect                                                              This divergence is a problem
Contents

                                                                                                             Elevated equities vs. collapsed consumer confidence
                  The unprecedented upheaval in                 asset outperformance. This is creating
                  financial markets has delivered record        a growing divergence between stock
                  volatility across different asset classes.    markets and the real economy, shaping        S&P500 index                            Monthly data:            2020        2000-2019
                  The sharp fall in stock markets, energy       what is arguably a false sense of optimism
                                                                                                             3500
Global outlook

                  prices and risk-sensitive currencies,         about a speedy economic recovery.                                                                         July
                                                                                                                            Extended period                                                          January
                  ahead of state-forced lockdowns, has
                                                                Amid a prolongation of lockdown                             of disconnect                            May
                  been countered with an equally sharp                                                                                                                                                  February
                                                                measures, an estimated 305 million           3000           between equities and                               June
                  recovery in many cases.                                                                                   consumer confidence
                                                                full-time jobs could be lost globally
                                                                                                                                                                     April
                  Leading the recovery hopes are equity         according to the ILO*. States cannot                                                                                      March
                  indices, which in the US have reached         compensate for this lost income              2500
                  new record highs since plunging in            indefinitely though and at some point,
                  March, despite the global economy             the real economy will have to stand on
Market themes

                  slipping into the worst recession             its own two legs.
                                                                                                             2000
                  since World War II. Global fiscal
                                                                Should lockdowns be extended, and
                  support currently stands at around
                                                                geopolitical tensions continue to boil,
                  $11 trillion and has provided investors
                                                                then recovery hopes may dwindle, and          1500
                  with confidence about an economic
                                                                stock markets may soon reconnect with
                  recovery. Moreover, the globally
                                                                the real economy. Although central
                  aggregated benchmark interest rate
                                                                banks and governments are expected           1000
                  has been slashed to decade lows and
FX forecasts

                                                                to continue supporting households
                  the policy environment has become
                                                                and businesses, longer-term risks
                  analogous to that seen during the
                                                                like corporate insolvencies and price          500
                  recovery from the financial crisis
                                                                uncertainties could increase stress on
                  in 2008.
                                                                what is already a fragile global economy.
                  A world abundant with liquidity, record       Fitch Ratings for example predicts
                                                                                                                  0
                  fiscal stimulus, low interest rates and low   worldwide corporate bond defaults this                20             40              60              80             100        120         140     160
                  inflation has generated a supportive          year may surpass levels reached during
Risk management

                                                                                                                                                      US consumer confidence index
                  environment for higher yielding risk-         the global recession in 2008.

                                                                                                             There is a disconnect between stock markets and the economy. Investors
                        Stock market euphoria reflects                                                       remain optimistic about the economic turnaround on the horizon, but
                        how huge stimulus measures have                                                      the reality is far from certain. If the risk of long‑term economic damage
                        revived the hunt for yield, but                                                      rises, this optimism will likely fade and weigh on risk‑friendly currencies,
Contact us

                        signals from the real economy                                                        including Sterling, and boost safe-havens like the Japanese Yen.
                        suggest this confidence is misplaced.                   George Vessey
                                                                                Currency Strategist, UK

                                                                                                             Chart sources: Refinitiv, Western Union Business Solutions – August 2020
                                                                                                                                                                                                                    8
                  * International Labour Organsiation
TH EME 2

                  New ‘lower for longer’ paradigm?                                                      Global interest rates are converging
Contents

                                                                                                        Average regional benchmark interest rates (%, unweighted)
                  Fighting against an economic or            was once reserved for policymakers in
                  financial crisis is never an easy task,    developed economies, has worked its
                  especially if the struggle is against an   way around the world.                       12                           Europe                      APAC                North                 Eurozone
                  invisible enemy like the coronavirus.                                                                               (ex. Eurozone)                                  America
                                                             In the wake of the increase in money
Global outlook

                  To soften the initial blow to their
                                                             supply, fears of inflationary pressures
                  respective economies, central banks
                                                             building are staging a comeback, seen
                  started a global and coordinated                                                       10
                                                             by the capital inflows into inflation-
                  easing cycle, cutting their benchmark
                                                             protected bonds and gold (record high                                                                 The most conventional monetary policy tool
                  rates more than 170 times since the
                                                             in August), but also a recovery of long-                                                               has lost its power. Global interest rates are
                  beginning of the year. But compared
                                                             term inflation expectations. Concerns                                                                   converging towards the lower zero bound.
                  to previous crises, the impact of these                                                8
                                                             about high inflation in the medium
                  conventional policy measures are
                                                             term still seem to be overdone, given
Market themes

                  limited because of the magnitude of
                                                             the deflationary effects currently in
                  the recession and an already ultra-low
                                                             place. But this could change in the long
                  policy rate environment inherited from                                                 6
                                                             term, especially with the preference
                  the past crisis.
                                                             for higher inflation being prevalent to
                  A more than two-year long trade war,       erode some of the recently issued debt.
                  European political hurdles, the Brexit
                                                             In emerging markets, rating agencies        4
                  saga, and a Chinese slowdown have
                                                             have warned that the danger of
                  worn down policymakers. Thus, the
FX forecasts

                                                             monetary financed fiscal debt could
                  scope of further rate cuts and the
                                                             lead to a deterioration in confidence
                  margin of error were slim. Against this
                                                             and macroeconomic soundness. Given          2
                  backdrop, more and more central
                                                             the massive issuance of new debt and
                  banks leaned toward unconventional
                                                             the rise of zombie companies in the
                  tools and started increasing their
                                                             developed world, the efficiency and
                  purchases of government bonds. What                                                    0
                                                             effectiveness of monetary policy is now
                  was first used by the Japanese central
                                                             in question.                                     2000                2004                  2008                 2012                  2016             2020
Risk management

                  bank in 2001 to fight deflation, and

                                                                                                        Zero interest rate policy (ZIRP) has now become integral and could
                       Negative rates and massive                                                       anchor rates at lower levels for longer. Markets are not expecting any
                       injections of liquidity have                                                     rate increases in the Eurozone, the US and Japan in 2021, which could
                       created asymmetries that could                                                   establish fiscal policy as the main driver of volatility.
Contact us

                       govern the behaviour of financial
                       markets for years to come.                            Boris Kovacevic
                                                                             Currency Strategist, CEE

                                                                                                        Chart sources: International Bank for Settlement Database, Western Union Business Solutions – August 2020
                                                                                                                                                                                                                       9
TH EME 3

                  Today's global trade is not like 2008                                                      Global trade outlook different this time
Contents

                                                                                                             Annual change in trade volumes (goods & services) by country
                  COVID-19 highlighted unexpected and          may drag on trade, like geopolitical
                  adverse effects of globalisation on          tensions (ongoing US-China dispute),
                  trade. For instance, western economies       distressed company balance                        USA       China       Germany         UK       Japan        France        Hong Kong          South Korea          Italy
                  are overly reliant on, and exposed to        sheets after the crisis, or the likely
Global outlook

                  the Asian continent – especially China –     reintroduction of tariffs between the EU      40%
                  for producing health care goods and          and the UK next year. However, it will
                  medical materials. As a result, there’s      be interesting to see how faster digital                 Stronger global trade                                                     Weaker global trade
                  now a global call from policymakers          transformation, enabling increased             30%       momentum into                                                             momentum into
                  demanding a domestic relocation              services trade, could counter this stress                the 2008 crisis                                                           the COVID-19 crisis
                  of overseas production across some           in global goods trade.
                  strategic and mission-critical sectors.                                                    20%
                                                               What can we learn from 2008? It's
                  Historically speaking, officials generally   difficult to compare as the context,
Market themes

                  resort to inward-looking solutions           pre-crisis trade momentum, and crisis
                                                                                                              10%
                  during times of crisis, and it may not be    itself was completely different. This
                  so different post-COVID. The so called       time both global supply and demand
                  $700bn “Buy American” investment             factors are at play, so the effects could
                                                                                                               0%
                  plan unveiled by the Democrat’s US           last longer. If the WTO considers a
                  presidential candidate, Joe Biden, or        “V-shaped” recovery in global trade
                  even the reference to ‘home relocation’      as a likely scenario in 2021, it may be
                                                                                                             -10%
                  used by new French PM Jean Castex            overly optimistic given global demand
FX forecasts

                  during his introductory speech, are two      could remain distressed due to higher
                  examples illustrating the shift towards      corporate insolvencies and weaker
                                                                                                             -20%
                  more protectionist policies in the           purchasing power of consumers. In
                  short run.                                   addition, more protectionist behaviours
                                                               could also keep trade activity near to
                  Beyond this global picture, we cannot                                                      -30%
                                                               its lowest level over the past 10 years.
                  overlook other potential hurdles that
                                                                                                                            2008                2009               2010                                     2019                2020*
Risk management

                                                                                                             Unlike previous crisis, we could see a slower and uneven recovery of trade
                       The recovery of global trade could                                                    following COVID-19. The existing growth trajectory, and narrative around
                       be very gradual as protectionist                                                      protectionism is vastly different versus 2008. Furthermore, weaker global
                       practices are a common tool used                                                      demand caused by increasing unemployment and bankruptcies may cap
Contact us

                       by policymakers in the aftermath                                                      2021 prospects.
                       of a crisis.                                            Guillaume Dejean
                                                                               Currency Strategist, France

                                                                                                             Chart sources: National Customs Services & Ministry of Trade, Refinitiv, Western Union Business Solutions, 2019.
                                                                                                             Performance based on comparison between H1 2019 and H1 2020 periods.
                                                                                                                                                                                                                                        10
TH EME 4

                  Transatlantic battle for dominance                                                        US Dollar facing multi-year turning point?
Contents

                                                                                                            COVID-19 may transform currencies just like 2008
                  The role of the US as the undisputed         As the second largest economic
                  financial capital of the world has           region, Europe’s gaining attention. Still
                  shaped the 21st century. The depth of its    unclear, but the recent confirmation of                           US Dollar nominal effective                           Relative US stock performance
                  financial markets has attracted global       a joint European debt issuance could                              exchange rate (LHS)                                   vs. world (RHS)
Global outlook

                  investors, searching for safe yield in an    constitute a “Hamiltonian moment”.
                  ever-more yield-less world.                  The term refers to the first joined debt
                                                               issuance of the United States, initiated                          US stocks and                 "FX Regime change"             US stocks and
                  Since 2010, the US stock and debt                                                          140                 the US Dollar                 Great Financial Crisis         the US Dollar            6.5
                                                               by Treasury Secretary Alexander
                  markets and the US Dollar have                                                                                 underperform                  as a catalyst for a            overperform
                                                               Hamilton. This step fundamentally                                 the world                     trend change                   the world
                  outperformed the rest of the
                                                               changed the fiscal structure of the
                  world. However, confirmation of
                                                               country. Now, market participants are                                                                                                                   6.0
                  Europe’s recovery plan, arguable                                                           130
                                                               wondering whether Europe’s stimulus
                  US‑mismanagement of the pandemic,
Market themes

                                                               package will ignite a new EU impetus,
                  and the rise of China’s Renminbi,
                                                               including more coordination and                                                                                                                         5.5
                  have put into question the “exorbitant
                                                               solidarity policies.
                  privilege” of the US currency. In                                                          120
                  combination with domestic US issues          The decreased short-term risk of a
                  like the long-lasting debate about the       break-up could potentially compensate                                                                                                                   5.0
                  US twin deficit, and a rise of social        for the debt inflows that vanished in
                  unrest, investors have started to look       the Eurozone after the introduction           110
                  for alternatives. But since 2010, it seems   of negative interest rates. However,                                                                                                                    4.5
FX forecasts

                  investors have failed to find a credible     2021 German elections will officialise
                  substitute for the greenback.                Angela Merkel’s farewell, who is widely
                                                                                                             100
                                                               considered the ‘EU’s engine’. Those                                                                                                                     4.0
                  This search was also intensified by the
                                                               seeking long-term diversification out of
                  US-Sino trade war and rising global
                                                               US dollars will know that the Euro will
                  geopolitical tensions; both resulting in
                                                               be vulnerable to pre-election populist
                  decreased global trade and a sell-off                                                      90                                                                                                        3.5
                                                               and Eurosceptic rhetoric.
                  of procyclical assets.                                                                           2000               2004                 2008                 2012            2016          2020
Risk management

                                                                                                            The first signs of a capital rotation into risk-prone assets are emerging.
                       With global interest rates converging,                                               A depreciation of the US currency will be dependent on a continuation
                       proper crisis management and                                                         of this trend, but COVID-19 may just trigger a major multi‑year global
                       economic growth differentials could                                                  FX regime change.
Contact us

                       overhaul the balance of power on the
                       world stage after the recession.                          Boris Kovacevic
                                                                                 Currency Strategist, CEE

                                                                                                            Chart sources: Refinitiv, Western Union Business Solutions – August 2020
                                                                                                                                                                                                                         11
TH EME 5

                  UK trade facing pivotal year                                                             Tariffs could upend UK-EU trade
Contents

                                                                                                           UK exports to EU & possible tariffs under WTO rules
                  The UK’s role as a trading nation           The EU accounted for almost 50% of
                  ‘should’ change significantly in 2021.      the UK’s total trade in goods in 2019, but
                  Once the Brexit transition period           UK-US trade also matters. In fact, the       UK exports to EU                                                                                             Tariff under
                                                              US is Britain’s biggest individual export    in 2019 (£bn)                    UK exports (LHS)                   Average EU tariffs (RHS)               WTO terms (%)
                  ends this year, future dealings with
Global outlook

                  third countries will likely be defined      destination and Britain is the fourth-       20                                                                                                                 50%
                  by the UK’s eventual relationship with      largest destination for US exports. Thus
                  Europe. Yet UK-EU negotiations remain       securing a free trade deal with the US
                                                                                                                                                                                                                 43.70%
                  challenging and failure to reach a          may greatly benefit some sectors but
                                                              hopes of reaching a deal before US
                  trade deal is still a prospect, which                                                    16                                                                                                                40%
                                                              elections in November have faded.
                  may lead to the introduction of both
                  tariff and non-tariff barriers next year.   In the absence of a trade agreement
                  In a world gripped by virus-related         with the EU, reverting to WTO rules
                                                              could intensify supply chain challenges.
Market themes

                  supply chain disruption and growth
                                                              COVID-19 imposed shocks on food              12                                                                                                                 30%
                  concerns, a no‑trade deal Brexit could
                  exacerbate the economic shock.              supply chains for example and the
                                                              rapid response of these supply chains
                  It is unclear whether shortening or         has underscored the importance of an
                  diversifying supply chains would have                                                                                                                           19.80%
                                                              open and predictable international           8                                                                                                                  20%
                  helped companies avoid the blow             trading environment. In a no-trade
                  caused by COVID-19, but many are            deal scenario, supply chain resilience                                                                                             14.90%
                  now looking at doing so in the future.      will be tested further. A British cereal                                                            11.50%
FX forecasts

                  Supply chains can be flexible, but it       manufacturer for example, could face
                                                                                                           4                                                                                                                  10%
                  takes time to find alternative sources      complicated non-tariff barriers on top
                  of a comparable quality. Consequently,      of tariffs of 14.9%.
                                                                                                                                   4.70%           2.40%
                  the UK will be left even more exposed if    Time is running out for the UK and EU                2.50%
                  a trade deal isn’t agreed with Europe.      to resolve their differences and the
                  Supply chain simplification and             longer the negotiations go on, the           0                                                                                                                   0%
                  ‘nearshoring’ by UK firms could have        more costs businesses might have to               Petroleum        Transport Electrical            Clothing      Beverages         Cereals          Dairy
                  resulted in much closer UK-EU trade                                                                           equipment machinary                            & Tobacco                        products
Risk management

                                                              incur to protect themselves from a
                  relations in 2021.                          disruptive no-deal scenario.

                                                                                                           There are currently no tariffs on trade between the UK and EU
                       Supply chain simplification and                                                     member states. If a UK-EU trade deal is not in place by Dec 31, 2020
                       ‘nearshoring’ by UK firms could                                                     though, resulting barriers to trade with EU and non-EU countries could
                       have resulted in much closer                                                        significantly damage export and import business and derail economic
Contact us

                       UK‑EU trade relations in 2021.                                                      recovery hopes.
                                                                               George Vessey
                                                                               Currency Strategist, UK

                                                                                                           Chart sources: UK Trade Info, ONS, WTO World Tariff Profiles, Western Union Business Solutions – August 2020
                                                                                                                                                                                                                                  12
TH EME 6

                  Try and isolate China                                                                   Supply chain diversification hitting Chinese trade?
Contents

                                                                                                          Measuring China’s cut of world GDP and exports
                  China established itself as the engine    For the Chinese economy, a global
                  for global growth, accounting for         trend of manufacturers reducing their
                  around 30% of world GDP (source:          reliance on China could cause severe
                                                                                                          16%                       Share of China in global                     Share of China
                  IMF, period 2013-2018). However, will     damage in 2021.                                                         exports of merchandise                       in global GDP             16%
Global outlook

                  the world’s second largest economy        Looking beyond business, China is also
                  maintain the position of being the        suffering from a political and economic       14%
                  world’s main locomotive post-COVID?       backlash from several of its peers who                                       China’s share of global exports has
                                                                                                                                                                                                           13%
                                                            fear the rise of its influence across the                                    flatlined in recent years, highlighting
                  The supply shock following the Great
                                                            globe, whilst also condemning what            12%                            the world’s supply chain diversification
                  Lockdown of 2020 highlighted the
                                                            they consider an authoritarian regime.                                       shift even before COVID-19 hit.
                  reliance of western economies on
                                                            The introduction of a new national
                  China, especially in the manufacturing                                                  10%
                                                            security law in Hong Kong led US
Market themes

                  process. Indeed, manufacturers
                                                            officials to withdraw the former British
                  suffered from severe disruptions
                                                            colony’s special economic status. The
                  across their supply chain when                                                          8%
                                                            recent ban of telecommunication
                  Chinese factories suddenly shut down
                                                            company Huawei from building its
                  in January. Driven by risk mitigation
                                                            British 5G network is a further example
                  strategies, China may now suffer                                                        6%
                                                            of the threat that is hanging over
                  from a gradual decrease in foreign        China: international isolation.
                  investments in the years ahead.
FX forecasts

                                                            However, given the high interest of           4%
                  Relocating some industrial production     western economies in China, how much
                  to countries where labour costs are       can the world disconnect itself from
                  cheaper than China, like Vietnam,         such a huge market? It’s important            2%
                  will be considered. India is already      to remember China boasts 1.3bn
                  increasing competition with China as it   consumers and its 2021 GDP growth
                  offers an attractive blend of expertise   forecast of +8.2% (source: IMF) looks         0%
                  and low costs.                            highly attractive in a post-crisis era.            1982             1988              1994             2000             2006          2012   2018
Risk management

                                                                                                          If a resurgence of trade conflicts and international sanctions on China
                       China faces a year ahead like no                                                   dampen its post-COVID economic recovery, there will be consequences
                       other amidst trade protectionism,                                                  for the world economy too. Volatility in China’s currency is also a key area
                       global supply chain diversification,                                               of focus, especially if China seeks to ‘revalue’ its Renminbi to support
Contact us

                       as well as a political backlash                                                    trade.
                       regarding Hong Kong.                                 Guillaume Dejean
                                                                            Currency Strategist, France

                                                                                                          Chart sources: World Bank, Western Union Business Solutions, 2019 annual data
                                                                                                                                                                                                                13
TH EME 7

                  CEE growth model to transform?                                                        CEE’s trade openness a blessing or a curse?
Contents

                                                                                                        Imports and exports as a share of Gross Domestic Product
                  Central and Eastern Europe (CEE) has       The period after the Great Financial
                  made remarkable progress since its         Crisis demonstrated the limits of
                  transition to market economies. The        the post-transition growth model.                   USA
                  major turning point in the modern          Therefore, it could get increasingly
                                                                                                               Japan
Global outlook

                  economic history of the region was in      harder for the region to replicate the
                                                                                                               China
                  1997, when the region experienced its      growth rates registered between 1997
                                                                                                               Russia
                  first economic growth after the fall of    and 2007, especially with the rise of
                  the Soviet Union. Since then, CEE has      Southeast Asian exports and structural         Romania
                  grown at double the rate of Western        changes across the automotive sector.
                                                                                                              Poland
                  Europe, making it an attractive place
                                                             Still, every crisis comes with risks and          Latvia
                  to invest.
                                                             opportunities. CEE governments on              Bulgaria
                  A unifying factor in the convergence       average enjoy more fiscal freedom to            Belarus
Market themes

                  of the CEE economies was the strong        lead structural changes. The region is          Estonia
                  emphasis on capital inflows, facilitated   uniquely positioned to diversify to a       Czech Rep.
                  by market reforms, competitive             knowledge-based economy by focusing
                                                                                                            Slovenia
                  wages, and low-valued currencies.          on investments in innovation. The
                                                                                                           Lithuania
                  These flows – largely catered to the       large pool of talent and the increasing
                                                                                                            Hungary
                  manufacturing base – have made the         importance of the digital economy
                  region vulnerable to exogenous shocks.     could help the region establish                Slovakia

                                                             itself as a frontier market in digital                                                                                         CEE6 economies
FX forecasts

                  The geographical proximity to                                                            East Asia                                                                        highly dependent on trade
                                                             transformation.
                  Germany and reliance on the                                                             South Asia                                                                        compared to other regions.
                  automotive industry amplifies this         Given the similar starting points and            LATAM
                  procyclical connection. This contributes   common challenges the region faces,                 SEA
                  to shaping the region as manufacturing     cooperation between countries could
                                                                                                               CEE6*
                  exporters with a strong bias towards       unleash the potential to fully capture
                  Europe. The recession experienced          scale effects and share best practices.                     0%                   40%                  80%                   120%                  160%
                  after the initial COVID-19 shock stands                                                                                         Imports + exports as % of GDP
Risk management

                  as a testimony to these dependencies.

                                                                                                        The global economic profile of most of Central and Eastern Europe has
                       Its growth model is at risk. Yet                                                 significantly affected the region as global trade has plummeted. CEE
                       fiscal freedom across Central and                                                economies could shrink by an average of 5.4% this year before we see
                       Eastern Europe could just help the                                               a 2021 counter strategy materialise.
Contact us

                       region establish itself as a frontier
                       market in digital transformation.                     Boris Kovacevic
                                                                             Currency Strategist, CEE
                                                                                                        Chart sources: Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2015), “The Next Generation
                                                                                                        of the Penn World Table”, Western Union Business Solutions – July 2020; Data from 2017;
                                                                                                        * CEE6 = Czech Republic, Poland, Hungary, Slovakia, Bulgaria, Romania; SEA = Southeast Asia
                                                                                                                                                                                                                      14
TH EME 8

                  EM currencies backed by yield                                                              Yield gap to benefit EM currencies in 2021?
Contents

                                                                                                             Average policy rates, developed vs. emerging countries
                  It’s been a painful year for Emerging       Firstly, we should witness a sharp
                  Markets so far after they experienced       rebound of global growth next year,
                  record capital outflows during the          meaning no further extension of
                                                                                                                                                        Developed economies                    Emerging economies
                  pandemic, losing $83.3bn in March           the pandemic. If a second wave of
                                                                                                              10%
Global outlook

                  alone (source IIF). When investors get      COVID-19 triggers a renewed risk-off                              9.5%
                  nervous and market volatility spikes,       market, history suggests this would
                  EM assets are usually the first ones to     clearly dampen demand for assets with
                  be cut across investment portfolios.        a high risk/reward profile across the
                  Consequently, several EM currencies         emerging world.                                  8%
                  collapsed this year, with some reaching                                                                               1.6x          7.5%
                                                              Secondly, debt matters. In a post-                                                                                        Average policy rate across EM is
                  record lows.
                                                              crisis environment where investors’                                                                                         20 times higher vs. developed
                  Yet this collapse to rock bottom could                                                                                                                                       markets (as of July 2020)
                                                              confidence is frail, fundamentals will
Market themes

                                                                                                                         6.0%
                  eventually see a material recovery          count during asset allocation decisions.         6%
                  in 2021 if EM currencies are ‘first in                                                                                                      1.7x
                                                              Investors may shun countries that
                  and first out’ of the crisis. Considering   display high debt, a current account                                                                          4.6%
                  we have a near-zero interest rate           deficit, and weak economic growth.                                               4.3%
                  environment across developed
                                                                                                               4%
                  markets, and no rush from central           While Brazil, South Africa or India’s
                  bankers there to tighten monetary           currencies look very cheap and
                                                              attractive today, their upside potential                                                                                            2.8%
                  conditions after the crisis, conditions
FX forecasts

                  could turn favourable for EM assets.        will become evident as their growth                                                                                   9.2x                                 2.0%
                  Offering investors a good mix of high       prospects emerge. CEE currencies like            2%
                  returns and cheap valuations, these         the Polish Zloty look less attractive from
                                                                                                                                                                                                           3.5x
                  assets could gradually catch the eye of     a yield perspective but would offer                                                                                          0.8%
                                                                                                                                                                     0.5%                                                       20x
                  those in the search of yield. However,      more guarantees as Eastern European
                                                                                                                                                                                                                  0.1%
                  two boxes need to be ticked in 2021 to      economies could benefit from a strong
                                                                                                               0%
                  make that scenario happen.                  recovery across Western Europe.
                                                                                                                            2000                  2007                   2009                  2019                 2020*
Risk management

                                                                                                             While emerging currencies footed a large part of the crisis bill, they could
                       Will a catastrophic year be followed                                                  see a material bounce back in 2021 if global risks ease. In a near-zero
                       by massive inflows back into emerging                                                 interest rate environment across developed markets, higher returns and
                       markets? Potentially, if global growth                                                very cheap valuations make EM currencies more attractive.
Contact us

                       returns and the ‘20 times’ higher rate
                       advantage can be maintained.                            Guillaume Dejean
                                                                               Currency Strategist, France

                                                                                                             Chart sources: BIS, Western Union Business Solutions - June 2020. Average rate based on monthly policy rates of
                                                                                                             38 developed and emerging countries collected and published by the Bank for International Settlements.
                                                                                                                                                                                                                                  15
Contact us   Risk management   FX forecasts   Market themes   Global outlook   Contents

                                                                               SECTION 3

                                                              FX forecasts
GBP / USD                                                                                           PA ST            FU TU R E

                  The dollar’s rise and fall
Contents

                  While Brexit news has driven the                         Investors steered clear of the pound,                        After years of having relatively higher         On the other hand, there aren’t many
                  GBP/USD rate over the last few years,                    concerned by the UK government’s                             interest rates, US rates are now in line        positive catalysts driving the pound
                  recent price action was largely down                     belated reaction to the crisis and                           with other developed nations: near zero.        either. Growing speculation about
                  to USD moves. GBP/USD spiked to $1.35                    the dire forecasts that the UK would                                                                         further UK rate cuts may limit sterling
                                                                                                                                        The US Dollar might be pressured as
Global outlook

                  following the UK election victory late                   register its largest recession in 300                                                                        upside as negative interest rate policy
                                                                                                                                        the tense political climate restricts
                  last year as investors welcomed political                years. No-trade deal Brexit concerns                                                                         remains in active review by the BOE.
                                                                                                                                        stimulus efforts while the rise in
                  stability and hoped UK-EU talks would                    also resurfaced as the government
                                                                                                                                        coronavirus cases hinders recovery              Will a change of leadership in the US
                  become more straightforward. But the                     refrained from requesting an extension
                                                                                                                                        hopes. Moreover, a change of                    be good news for the UK? Not if it
                  coronavirus outbreak then rippled its                    to the transition period.
                                                                                                                                        president to the less business-friendly         leads to the US-UK trade deal being
                  way around the world and upended
                                                                           Nevertheless, the US Dollar weakened                         Joe Biden compared to Donald Trump,             postponed. A UK-EU deal, due by
                  sterling’s recovery.
                                                                           extensively from March onwards                               may also negatively impact the dollar           31 December, also remains a major
                  Financial markets were sent into a spin                  following US rate cuts and a rise of                         in the future.                                  uncertainty, which has the potential to
Market themes

                  when governments forced nations                          risk-appetite among investors watching                                                                       drag GBP/USD back under $1.20.
                                                                                                                                        Should the dollar-weakening trend
                  into lockdown. Sterling was sold                         burgeoning signs of a strong global
                                                                                                                                        continue, 2021 may allow GBP/USD to
                  aggressively against the safe-haven                      recovery.
                                                                                                                                        press into the higher realms of the $1.30s.
                  and highly liquid US Dollar.

                  The pandemic-driven plunge below $1.20                                                                                Will Brexit boost or bust the pound?
FX forecasts

                  Historical volatility of the GBP/USD exchange rate                                                                    WUBS-Oxford Economics future projections for GBP/USD

                                                                                                                                                                                                                  $1.43 Upper bound
                                                                                                                                                                                      $1.40
                  $1.40
                                                                                                                                                       $1.34
Risk management

                                                                             A technical barrier at $1.33

                  $1.30
                                                                                                                                                                                                                  $1.28 Baseline
                                                                                                                                                                                      $1.27
                                                                                                                                                       $1.26
                                                                                     11% range
                  $1.20
                                                      A technical barrier at $1.20
                                                                                                                                                        $1.17
                                                                                                                                                                                      $1.15
                                                                                                                                                                                                                   $1.13 Lower bound
Contact us

                  $1.10                                                                     Lowest level in 35 years ($1.14)

                       Jan 19            Apr 19            Jul 19           Oct 19           Jan 20          Apr 20           Jul 20    Oct 20         Jan 21         Apr 21          Jul 21       Oct 21         Jan 22

                  Chart sources: Oxford Economics, Reuters, Western Union Business Solutions – August 2020                                                                                                                         17
GBP / EUR                                                                                           PA ST            FU TU R E

                  The revival of the Euro
Contents

                  The pound depreciated circa 13%                          Investors avoided the risk-correlated                        The agreed stimulus package is a clear                 The long-lasting impact of coronavirus
                  against the Euro from February to                        pound, concerned by the UK’s growing                         sign of harmony amongst EU states                      on the economies of both the UK and
                  March, collapsing from a 3-year high                     twin deficit, the government’s handling                      amid the wave of Euroscepticism and                    the Eurozone may not be realised
                  near €1.21 to its lowest level in 11 years               of coronavirus and ongoing Brexit-                           Brexit that has haunted the bloc for                   until late 2020 or even 2021, due to the
Global outlook

                  near €1.05. Despite a short period of                    related uncertainty.                                         years. The ease of political divergences               huge support by policymakers in both
                  relief, rebounding off the March floor,                                                                               in Europe boosted demand for the Euro                  regions to help protect jobs and reduce
                                                                           A surge of concerns about a “Hard
                  GBP/EUR steadily descended over the                                                                                   and GBP/EUR may continue drifting                      bankruptcies.
                                                                           Brexit” scenario due to the persistent
                  summer months.                                                                                                        lower as a result.
                                                                           trade talk deadlock between the UK                                                                                  A no-trade deal Brexit is also a key
                  Sterling’s strong correlation with risk                  and EU underpinned huge speculative                          The trajectory of GBP/EUR may largely                  risk lingering over both regions,
                  sentiment led to an aggressive sell-off                  bets against the pound.                                      depend on how successful the global                    though the UK and thus the pound is
                  during the height of the market turmoil,                                                                              economic recovery is. Will the UK and                  expected to suffer more so in the short
                                                                           Meanwhile, the Euro was boosted as
                  but since the revival of risk appetite,                                                                               Europe differ in their recovery speeds                 run. Expectations of GBP/EUR falling
Market themes

                                                                           investors cheered the EU’s historic
                  GBP/EUR has failed to recoup all of its                                                                               and how will a potential second or                     towards parity in such a scenario are
                                                                           €750bn rescue fund to help shore up
                  losses.                                                                                                               third wave of the virus be managed by                  growing, particularly if it prompts a
                                                                           European economies reeling from the
                                                                                                                                        governments in both areas?                             Scottish independence referendum too.
                                                                           pandemic.
                                                                                                                                                                                               Conversely, a trade deal should help
                                                                                                                                                                                               GBP/EUR climb towards €1 20.

                  A consistent 12% trading range over the last 3 years                                                                  To parity or above €1.20?
FX forecasts

                  Historical volatility of the GBP/EUR exchange rate                                                                    WUBS-Oxford Economics future projections for GBP/EUR*

                                                                                                                                                                                                                            €1.43 Upper bound
                  €1.40                                                                                                                                                                     €1.35
Risk management

                  €1.30                                                                                                                                  €1.25
                                                                                  A technical ceiling at €1.20
                  €1.20
                                                                                                                                                                                             €1.12                          €1.13 Baseline
                                                                                                                                                          €1.11
                                                                                          12% range
                  €1.10

                                                          A technical floor at €1.07                                                                     €0.99
                  €1.00
                                                                                                      Lowest level in
                                                                                                      5 years (€1.05)                                                                       €0.93
Contact us

                                                                                                                                                                                                                            €0.89 Lower bound
                  €.90

                       Jan 19            Apr 19            Jul 19           Oct 19           Jan 20          Apr 20           Jul 20    Oct 20           Jan 21           Apr 21            Jul 21           Oct 21         Jan 22

                  Chart sources: Oxford Economics, Reuters, Western Union Business Solutions – August 2020                              * GBP/EUR projections calculated through projections on EUR/USD and GBP/USD rates                    18
GBP / AUD                                                                                           PA ST            FU TU R E

                  Restored appetite for Aussie
Contents

                  Over the past three years, the pound                     The March 2020 peak was partly                               The trajectory of GBP/AUD largely                      China is embroiled in several economic
                  has steadily climbed against the                         a result of the pandemic-induced                             depends on whether a second or                         and geopolitical disputes, including
                  Australian Dollar, but 2019 and 2020                     economic slowdown in China.                                  third wave of coronavirus scuppers                     with the UK and Australia. An
                  gains were wiped out in just four                        Commodity prices also plunged in line                        economic recovery hopes and sparks                     escalation of these disputes could lead
Global outlook

                  months. GBP/AUD peaked at A$2.08                         with global demand that subsequently                         risk aversion across financial markets.                to economic sanctions which would
                  during the height of the pandemic-                       dried up under lockdown policy.                              Historically, the AUD outperforms                      pose a serious threat to Australia’s
                  induced market turmoil in March                                                                                       the pound during times of economic                     recovery hopes.
                                                                           However, the GBP/AUD exchange
                  before falling 15% in just one quarter.                                                                               recovery.
                                                                           rate staged a sharp U-turn in line                                                                                  In late summer, GBP/AUD bounced
                  Prior to the pandemic, the exchange                      with global stock markets as risk                            If financial markets reel in the event of              from a long-term support floor around
                  rate had been influenced by growing                      appetite resurfaced. Commodity                               a new round of lockdown measures,                      the A$1.77 mark, largely in line with
                  US-China trade tensions due to                           prices recovered which strengthened                          then investors may ditch high yielding                 renewed and stringent restrictions in
                  Australia’s strong trade links with China.               AUD. Also, investors sought out higher                       assets, including the Aussie dollar. As                Australia following a rise in virus cases.
Market themes

                  The Australian currency is a proxy                       yielding assets such as Australian                           per the trend in March, GBP/AUD may                    A break of the A$1.75 technical barrier
                  for both the Chinese economy and                         government bonds.                                            drift higher as a result.                              would signal more potential downside
                  commodity prices.                                                                                                                                                            risk for the exchange rate.

                  Risk reversal revives Aussie                                                                                          Will a global recovery drag on GBP/AUD?
FX forecasts

                  Historical volatility of the GBP/AUD exchange rate                                                                    WUBS-Oxford Economics future projections for GBP/AUD*

                  A$2.35                                                                                                                                                                                                    A$2.26 Upper bound
                                                                                                                                                                                           A$2.20
                                                                                             4-year high                                                 A$2.12
                  A$2.15
                                                                                     A technical barrier at A$2.00
Risk management

                  A$1.95                                             14% range
                                                                                                                                                         A$1.81                             A$1.81                          A$1.81 Baseline

                  A$1.75
                                                           A technical barrier at A$1.75

                                                                                                                                                         A$1.52
                  A$1.55
                                                                                                                                                                                           A$1.46
                                                                                                                                                                                                                            A$1.41 Lower bound
Contact us

                  A$1.35

                       Jan 19            Apr 19            Jul 19           Oct 19           Jan 20          Apr 20           Jul 20    Oct 20           Jan 21           Apr 21            Jul 21           Oct 21         Jan 22

                  Chart sources: Oxford Economics, Reuters, Western Union Business Solutions – August 2020                              * GBP/AUD projections calculated through projections on AUD/USD and GBP/USD rates                     19
EUR / USD                                                                                           PA ST            FU TU R E

                  A durable uptrend?
Contents

                  EUR/USD has seen a sharp increase in                     Another shift in sentiment was seen as                       A positive summer period peaked with        save jobs and restrain bankruptcies.
                  activity in 2020 and appears to have                     the US was hit with a new large wave                         the conclusion of an historical deal by     However, belated effects could pop up
                  reversed the downtrend started in                        of infections over the summer months,                        European leaders on a €750bn stimulus       in late 2020 or early 2021 and dampen
                  2018. After falling to a three-year low                  replacing Europe as the area the most                        plan. Yet there is no guarantee the         confidence in the Euro.
Global outlook

                  in March when the pandemic crisis                        impacted by the coronavirus.                                 Euro’s climb will continue or at what
                                                                                                                                                                                    For the US Dollar, a switch of president
                  peaked in Europe, EUR/USD roared                                                                                      pace.
                                                                           The effective management of the crisis,                                                                  to the less business friendly Joe Biden
                  back during spring and climbed by 10%
                                                                           which appears to be under control                            The trajectory of EUR/USD mainly            compared to Donald Trump may
                  in just three months.
                                                                           in Europe, coupled with the bold                             depends on two factors: 1) which of the     negatively impact the US currency,
                  The exchange rate flirted with the $1.15                 response by European officials in terms                      US and Europe will better manage the        amid a likely sell-off in US equities.
                  barrier over the summer, a ceiling that                  of economic stimulus, contributed                            crisis, especially in case of second or
                                                                                                                                                                                    German elections in 2021 will also be an
                  had held since January 2019. Once                        to a revival of confidence towards                           third waves, and 2) which will recover
                                                                                                                                                                                    important turning point for currencies.
                  this level was broken, EUR/USD was                       European assets, which fueled appetite                       the fastest.
Market themes

                                                                                                                                                                                    Investors will scrutinise Angela Merkel's
                  catapulted to fresh two-year highs                       for the Euro. In contrast, the greenback
                                                                                                                                        The economic damage in Europe               successor after her fourth consecutive
                  ($1.20) in another sign of improving                     was hurt by political deadlock in US
                                                                                                                                        has been cushioned thanks to the            and final term in charge.
                  sentiment towards the Euro.                              Congress over a new stimulus plan.
                                                                                                                                        huge support from policymakers to

                  An aggressive breakout higher                                                                                         Upside momentum facing many hurdles
FX forecasts

                  Historical volatility of the EUR/USD rate                                                                             WUBS-Oxford Economics future projections for EUR/USD

                                                                                                                                                                                                               $1.27 Upper bound
                                                                                                                                                                                  $1.24
                  $1.25

                               Downward trend since Feb. 2018                                                  +10% (3 months)                        $1.19
Risk management

                                                                                                                                                      $1.13                       $1.14                        $1.14 Baseline
                  $1.15

                                                                                                                                                      $1.07

                  $1.05                                                                                                                                                           $1.03
                                                                                                 Lowest level in 3 years                                                                                       $1.00 Lower bound
Contact us

                  $0.95

                       Jan 19            Apr 19            Jul 19           Oct 19           Jan 20          Apr 20           Jul 20    Oct 20       Jan 21         Apr 21        Jul 21        Oct 21        Jan 22

                  Chart sources: Oxford Economics, Reuters, Western Union Business Solutions – August 2020                                                                                                                      20
Contact us   Risk management   FX forecasts   Market themes   Global outlook   Contents

                                                                               SECTION 4

                                                              Risk management
RISK MANAGEMENT

                  Protecting profits post-crisis
Contents

                  Corporate risk managers face            face amid increased volatility and
                  challenges unlike any since the         uncertainty in timing of payments for
                  financial crisis of 2008. After         goods and services.
Global outlook

                  decades of steady growth in global
                                                          While there is no one size fits all
                  GDP and relatively low levels of
                                                          approach to FX risk management,
                  financial market volatility, treasury
                                                          the overarching objective to achieve
                  professionals and business owners
                                                          cash flow certainty and protect
                  find themselves in a new paradigm
                                                          profits from the effects of FX rate
                  as the effects from COVID continue
                                                          movements remain the same.
                  to ripple through both financial
Market themes

                  markets and global supply chains.       Looking ahead into 2021, it is
                                                          important that decision makers stay
                  While FX volatility stemming
                                                          focused on the basic building blocks
                  from fundamental forces such as
                                                          of hedge strategy development, and
                  loose monetary policy, negative
                                                          that throughout the year, tactics
                  real interest rates and rising
                                                          employed are regularly reviewed to
                  commodity prices continue to be
                                                          ensure that your company’s FX risk
                  topics discussed among cerebral
                                                          management objectives continue to
FX forecasts

                  academics and the financial press,
                                                          be met.
                  rarely does one hear about the
                  challenges corporate practitioners
Risk management

                       Rarely does one hear about the
                       challenges corporate practitioners
                       face amid increased volatility and
                       uncertainty in timing of payments
                                                                         David Renta
Contact us

                       for goods and services.                           Global Head of Hedging

                                                                                                  22
RISK MANAGEMENT

                  Considerations
Contents

                  A currency risk management strategy could reduce the possibility of                 This broader approach is especially critical amidst the COVID-19 post-
                  unexpected financial losses, make future cash flows more predictable,               pandemic market outlook.
Global outlook

                  and potentially provide a competitive advantage against others who
                                                                                                      In addition, uncertainty around underlying cash flow exposures caused
                  may leave themselves exposed to currency risk.
                                                                                                      by the pandemic create separate challenges for risk managers, as
                  However, any strategy is not simply a collection of financial products              critical terms like timing and amounts to hedge can change in an instant
                  that can be used to address specific exposures. Instead, success lies in            should supply chain disruption or changes to underlying demand for
                  building an end to end approach and risk mitigation culture, taking a               goods or services occur.
                  holistic and more disciplined approach to managing currency exposures.
Market themes

                       1     Identify currency exposures                   2        Set your 2021 goals                             3    Develop your hedging strategy

                      Using our tools like the WU® EDGE Platform,        Review the three common goals businesses                  We can then tailor a bespoke hedging
                      we can help you:                                   like yours usually have:                                  strategy to help you meet your goals:
FX forecasts

                      • Get full visibility over your future FX           • Protect profits from adverse currency                   • Set a minimum hedging threshold so
                        payments and exposures.                             swings.                                                   your profits are not left exposed.
                      • Accurately and easily forecast your               • Participate and benefit from favourable                 • Using market and industry insights,
                        foreign cash flows.                                 currency moves.                                           benchmark your strategy against best
                      • Calculate your currency risk against              • Enhance, outperform competitors or                        practices and scenarios.
                        potential market scenarios.                         achieve specific targets.
Risk management

                                                                                  Protect                                                  100
                                                                                                        50%
                                                                                                                                            75

                                                                                  Participate                                               50
                                                                                                  30%
                                                                                                                                            25

                                                                                                                                             0
                                                                                  Enhance
                                                                                                20%                                               1-3 months   4–6 months
Contact us

                                                                                                                                                 75% hedged    50% hedged

                                                                                                                                                                               23
RISK MANAGEMENT

                  Considerations
Contents

                  Although the objective of any risk management and hedging strategy is                                                                  At Western Union Business Solutions, we are dedicated to helping
                  easy to state, the challenge is to develop and execute the plan in such a                                                              companies manage these complexities and achieve their international
Global outlook

                  volatile and highly responsive environment.                                                                                            business goals.
                  It is more important than ever that companies, especially SMEs, find                                                                   Our simple three step approach to risk mitigation is designed to offer
                  partners to help them craft, benchmark and validate strategies against                                                                 decision makers and their advisors with unique insights, enabling
                  best practices, and provide specialist insights into how current events are                                                            smarter strategy development around trade and risk management,
                  reshaping the foreign exchange payments landscape.                                                                                     and ultimately better financial outcomes.
Market themes

                                      Without a strategy                                                                        Mitigate your risk                                                                         With a strategy

                          • Volatile cash flows and profits                                                        • Forwards – Protect                                                                     • Predictable cash flows and profits
FX forecasts

                          • Difficult forecasting                                                                  • Options* – Protect & Benefit                                                           • Reliable forecasting
                          • Chase exchange rates, leave your                                                       • SPOT – Top up                                                                          • More control over costs, not worrying
                            business exposed                                                                                                                                                                  about rates
                                                                                                                   • Market Orders – Target preferential rates
Risk management

                            Cash flow                                                                                                                                                                         Cash flow

                                                                                                                                   FORWARDS              OPTIONS

                                                                                                                                   SPOT                  MARKET ORDERS

                                                  VOLATILE                                                                                                                                                                      PREDICTABLE
Contact us

                  * These alternative hedging products allow you to lock in a rate of exchange to protect your profits, and give you the ability to benefit if the market moves in your favour. There are disadvantages to consider such as a
                    slightly less favourable protection rate versus a comparable Forward, but please speak to our hedging experts to understand more about the costs and benefits which can vary with each Options product.                           24
Are you ready for 2021?
                                         Contact us now to review your strategy

                                                   Get started >

Learn more here:
business.westernunion.com/en-gb/blog
About us
Contents

                  Western Union pioneered the idea of moving money around the world                                                                Western Union Business Solutions is transforming how businesses can
                  and has been connecting people globally for more than a century. As                                                              expand globally through one of the largest and most diverse payment
Global outlook

                  one of the world’s leading providers of cross-border business payments,                                                          networks in the world.
Market themes

                          Small businesses                               Corporate                        Financial institutions                               Legal                       Educational institutions                         NGOs
FX forecasts

                                                     WU® EDGE                                                                       International Payments                                                           Risk Management
                                                      • Connect with partners                                                        • Incoming                                                                       • Hedge specialists
                                                      • Real time, fee free*                                                         • Outgoing                                                                       • Improve cash flow
Risk management

                                                      • Visibility into exposures                                                    • Mass payments                                                                  • Help protect profits

                                                                                                                                  Global Payment                                                                              200 Countries
                                 Bank Account                    Cash                Card                Mobile*                                                                  130 Currencies
                                                                                                                                     Network                                                                                  and Territories
Contact us

                  * Transaction fee-free EDGE Network Payment services are available between fully accredited customers that have registered to use the WU® EDGE platform and are authorised by a WUBS affiliate to access services in
                  Australia, Austria, Canada, Czech Republic, France, Germany, Hong Kong, Italy, Malta, New Zealand, Poland, Singapore, Switzerland, United Kingdom, and USA. WUBS will apply a foreign currency exchange rate, which
                  includes a margin set by WUBS, whenever a transaction includes a currency conversion. Transaction fees may also apply to transactions other than EDGE Network Payment services.                                                  26
Western Union Business Solutions (WUBS) has based               Risk Disclosure Statements                                     For a complete listing of US state licensing, visit            services in Germany through Western Union’s wholly-           Poland
the opinions expressed in this communication on                 1. The risk of loss in leveraged foreign exchange trading      http://business.westernunion.com/about/notices/.               owned subsidiary Western Union International Bank             In Poland, Western Union Business Solutions is a division
information generally available to the public. Western                                                                         For additional information about Western Union Business        GmbH, Germany branch (referred to as “WUBS” or
                                                                can be substantial. You may sustain losses in excess of                                                                                                                                     of The Western Union Company and provides services
Union Business Solutions makes no warranty concerning                                                                          Solutions USA, LLC visit http://business.westernunion.         “Western Union Business Solutions”).
                                                                your initial margin funds. Placing contingent orders, such                                                                                                                                  in Poland through Western Union International Bank
the accuracy of this information and specifically                                                                              com/About/Compliance-Legal.                                    Western Union International Bank GmbH, Germany
                                                                as “stop loss” or “stop limit” orders will not necessarily                                                                                                                                  GmbH, Polish Branch (referred to as “WUBS” or “Western
disclaims any liability whatsoever for any loss arising                                                                                                                                       branch, has a registered place of business at
                                                                limit losses to the intended amounts. Market conditions                                                                                                                                     Union Business Solutions”).
from trading decisions based on the opinions expressed                                                                                                                                        Solmsstrasse 18, 60486 Frankfurt am Main, Germany and
                                                                may make it impossible to execute such orders. You may         EUROPE
and information contained in this communication. Such                                                                                                                                                                                                       Western Union International Bank GmbH, Polish Branch
                                                                be called upon at short notice to deposit additional                                                                          is a branch of Western Union International Bank GmbH
information and opinions are for general information                                                                           Austria                                                                                                                      (KRS No: 0000458059, NIP No: 1080015316), has a
                                                                margin funds. If the required funds are not provided                                                                          (registered in Austria, Registration Number 256184t,
purposes only and are not intended to present advice                                                                                                                                                                                                        registered place of business at Al. Jana Pawla II 29, 00-
                                                                within the prescribed time, your position may be               In Austria Western Union Business Solutions is a business      Regsistered Office address: Schubertring 11, 1010 Vienna,
with respect to matters reviewed and commented upon.                                                                                                                                          Austria).                                                     867 Warsaw, Poland, and is a branch of Western Union
                                                                liquidated. You will remain liable for any resulting deficit   unit of the Western Union Company and provides
This communication is not directed to, or intended for                                                                                                                                                                                                      International Bank GmbH (registration number 256184t)
                                                                in your account. You should therefore carefully consider       services in Austria through Western Union’s wholly-owned       Ireland
distribution to or use by, any person or entity who is a                                                                                                                                                                                                    Schubertring 11, 1010 Vienna, Austria.
                                                                whether such trading is suitable in light of your own          subsidiary, Western Union International Bank GmbH
citizen or resident of or located in any locality, state,                                                                                                                                     In Ireland, Western Union Business Solutions is a business    Switzerland
                                                                financial position and investment objectives.                  (referred to as "Western Union Business Solutions").
country or other jurisdiction where such distribution,                                                                                                                                        unit of The Western Union Company. Services in Ireland
                                                                2. Client assets received or held by WUBS or a WUBS            Western Union International Bank GmbH is registered in         are provided by Western Union International Bank              In Switzerland, Western Union Business Solutions is a
publication, availability or use would be contrary to
                                                                group company outside Hong Kong are subject to the             Austria (Vienna Commercial Court, Commercial Registry          GmbH.                                                         division of The Western Union Company. Services in
law or regulation or which would subject WUBS or its
                                                                applicable laws and regulations of the relevant overseas       number FN256184t, Sales Tax Identification Number:                                                                           Switzerland are provided by Rüesch International, LLC
affiliates to any registration or licensing requirement                                                                                                                                       Western Union International Bank GmbH is registered in
                                                                jurisdiction which may be different from the Securities        ATU 61347377), The Icon Vienna (Turm 24), Wiedner Gürtel                                                                     (Swiss branch), with a registered place of business at
within such jurisdiction.                                                                                                                                                                     Austria (Vienna Commercial Court, Commercial Registry
                                                                and Futures Ordinance (Cap. 571) and the rules made            13, 1100 Vienna, Austria and is licensed by the Austrian                                                                     Werdstrasse 2, P.O. Box 2063, 8021 Zurich, Switzerland
This communication has been prepared solely for                                                                                                                                               Number: FN256184t, Sales Tax Identification Number:
                                                                thereunder. Consequently, such client assets may not           Financial Markets Authority (Finanzmarktaufsicht).                                                                           (referred to as “WUBS” or “Western Union Business
informational purposes and does not in any way create                                                                                                                                         ATU 61347377), has its registered office at Schubertring
                                                                enjoy the same protection as that conferred on client          This document has been prepared solely for                                                                                   Solutions”).
any binding obligations on either party. Relations                                                                                                                                            11, 1010 Vienna, Austria and is licensed by the Austrian
                                                                assets received or held in Hong Kong.                          informational purposes and does not in any way create
between you and WUBS shall be governed by the                                                                                                                                                 Financial Market Authority (Finanzmarktaufsicht).             Western Union Business Solutions has based the opinions
                                                                New Zealand                                                    any binding obligations on either party. Relations             Western Union International Bank GmbH is regulated by         expressed herein on information generally available to
applicable terms and conditions provided to you
                                                                                                                               between you and Western Union Business Solutions shall         the Central Bank of Ireland for conduct of business rules.    the public. Western Union Business Solutions makes no
before you undertake any transaction with WUBS. No              Western Union Business Solutions is a division of The
                                                                                                                               be governed by the applicable terms and conditions.                                                                          warranty concerning the accuracy of this information
representations, warranties or conditions of any kind,          Western Union Company. In New Zealand, Western                                                                                Italy
                                                                                                                               No representations, warranties or conditions of any kind,                                                                    and specifically disclaims any liability whatsoever
express or implied, are made in this communication.             Union Business Solutions (Australia) Pty Ltd, NZ branch                                                                       In Italy, Western Union Business Solutions is a business
                                                                                                                               express or implied, are made in this document.                                                                               for any loss arising from trading decisions based on
© 2020 Western Union Holdings Inc. All rights reserved.         (company number 3527631 and FSP 168204) (“WUBS”) is                                                                           unit of the Western Union Company and provides
                                                                the issuer of the financial products (if any) referred to in   Czech Republic                                                                                                               the opinions expressed and information contained
                                                                                                                                                                                              services in Italy through Western Union’s wholly-owned
                                                                this communication. A Product Disclosure Statement is          In the Czech Republic, Western Union Business Solutions                                                                      herein. Such information and opinions are for general
                                                                                                                                                                                              subsidiary, Western Union International Bank GmbH,
ASIA PACIFIC                                                    available for each of the financial products that WUBS         is a division of The Western Union Company and provides                                                                      information only and are not intended to present advice
                                                                                                                                                                                              Italy Branch (referred to as "Western Union Business
                                                                issues and can be obtained by visiting http://business.        services in the Czech Republic through Western Union                                                                         with respect to matters reviewed and commented upon.
Australia                                                                                                                                                                                     Solutions").
                                                                westernunion.co.nz/about/compliance/.                          International Bank GmbH, organizační složka (referred                                                                        United Kingdom
In Australia, Western Union Business Solutions is a                                                                                                                                           Western Union International Bank GmbH, Italy Branch
                                                                This communication is not intended to provide advice           to as “WUBS” or “Western Union Business Solutions”).
division of The Western Union Company. In Australia,                                                                                                                                          (Registered Office in Rome: via Virigilio Maroso 50, 00142    Western Union Business Solutions is a business unit of the
                                                                and does not take account of your financial situation,         Western Union International Bank GmbH, organizační             Italy; Fiscal Code and Companies House Registration           Western Union Company and provides services in the
Western Union Business Solutions (Australia) Pty Limited
                                                                objectives and/or needs. Because of this, before you act       složka is registered in the Czech Commercial Register          number: 13068651002; Enrolled in the Bank Register held       UK through Western Union’s wholly-owned subsidiary,
ABN 24 150 129 749 and AFSL 404092 (“WUBS”) is the
issuer of the financial products (if any) referred to in this   on it (including making any decisions and/or trading)          held by the Municipal Court in Prague, identification          by Bank of Italy (no. 3446)), is a branch of Western Union    Western Union International Bank GmbH, UK Branch
communication.                                                  you should consider its appropriateness having regard          number 015 55 332, has a registered place of business at       International Bank GmbH, a company organised under            (WUIB).
                                                                to your own objectives, financial situation and/or             Václavské náměstí 62, 110 00 Prague 1, Czech Republic,         Austrian Law (Registered at the Vienna Commercial
A Product Disclosure Statement is available for each of         needs. WUBS recommends that you seek personalised              and is a branch of Western Union International Bank                                                                          WUIB (Branch Address: 131 Finsbury Pavement, London,
                                                                                                                                                                                              Court, Commercial Registry Number: FN256184t; Sales
the financial products that WUBS issues (if any) and can        (personal) financial advice from an authorised financial       GmbH (registration number 256184t) Schubertring 11, 1010                                                                     EC2A 1NT) is a branch of Western Union International
                                                                                                                                                                                              Tax Identification Number: ATU 61347377;Registered
be obtained by visiting our compliance and legal web            adviser.                                                       Vienna, Austria.                                                                                                             Bank GmbH (registered in Austria, company number
                                                                                                                                                                                              Office: The Icon Vienna (Turm 24), Wiedner Gürtel 13,
page: https://business.westernunion.com/en-au/About/                                                                                                                                                                                                        FN256184t, VAT Number ATU61347377, with its registered
                                                                Singapore                                                      Western Union International Bank GmbH is a bank                1100 Vienna, Austria; Corporate Capital: €12.000.000;
Compliance-Legal. Unless we expressly state otherwise                                                                                                                                                                                                       office at The Icon Vienna (Turm 24), Wiedner Gürtel 13,
                                                                                                                               registered on a list of banks maintained by the Austrian       Sole Shareholder (and therefore subject to the direction
any information given by WUBS in relation to financial          In Singapore, Western Union Business Solutions is a                                                                                                                                         1100 Vienna, Austria), which is licensed by the Austrian
                                                                                                                               Financial Market Authority (Finanzmarktaufsicht).              and coordination activity of): Western Union Overseas
products will be factual information only and does not          division of The Western Union Company. Depending                                                                                                                                            Financial Market Authority (Finanzmarktaufsicht). WUIB
                                                                                                                               Western Union International Bank GmbH, organizační             Limited) and which is a bank registered on a list of banks
take account of your financial situation, objectives or         on the nature and scope of the services, services in                                                                                                                                        is subject to limited regulation by the UK Financial
                                                                                                                               složka is registered on a list of banks and branches of        maintained by the Austrian Financial Market Authority
needs. Because of this, before you act on it (including         Singapore are provided by Western Union Business                                                                                                                                            Conduct Authority and Prudential Regulation Authority.
                                                                                                                               foreign banks maintained by the Czech National Bank.           (Finanzmarktaufsicht).
making any decision and/or trading) you should                  Solutions (Singapore) Pte Ltd (Licence No. PS20200438)                                                                                                                                      Details about the extent of WUIB’s regulation by the
consider its appropriateness having regard to your own          (“WUBS Singapore”) and/or WUBS Financial Services              France                                                         This document has been prepared solely for
                                                                                                                                                                                                                                                            Financial Conduct Authority and Prudential Regulation
objectives, financial situations and/or needs.                  (Singapore) Pte Ltd (Licence No. CMS 100116) (“WUBS FS                                                                        informational purposes and does not in any way create
                                                                                                                               In France, Western Union Business Solutions is a division                                                                    Authority are available from WUIB on request.
                                                                Singapore”) (collectively referred to as “WUBS”).                                                                             any binding obligations on either party. Relations
Before you decide to acquire a financial product from                                                                          of The Western Union Company and provides services                                                                           Custom House Financial (UK) Limited (registered in
                                                                                                                                                                                              between you and Western Union Business Solutions shall
WUBS you should read and consider the relevant                                                                                 in France through its wholly-owned subsidiary Western                                                                        England, Company Number 04380026, Registered
                                                                                                                                                                                              be governed by the applicable terms and conditions.
product disclosure statement.                                                                                                  Union International Bank GmbH, French branch,                                                                                Office Address: 200 Hammersmith Road, London W6
                                                                NORTH AMERICA                                                                                                                 No representations, warranties or conditions of any kind,
Hong Kong                                                                                                                      (referred to as “WUBS” or “Western Union Business                                                                            7DL) is authorised by the Financial Conduct Authority
                                                                                                                                                                                              express or implied, are made in this document.
                                                                Canada                                                         Solutions”).
In Hong Kong, Western Union Business Solutions is a                                                                                                                                           Malta                                                         under the Payment Services Regulations 2017 (Register
                                                                In Canada, Western Union Business Solutions is a division      Western Union International Bank GmbH, French branch                                                                         Reference: 517165) for the provision of payment services
division of The Western Union Company. Services in
                                                                of The Western Union Company. Services in Canada are           (RCS Nanterre 750 938 094) has a registered place of           Western Union Business Solutions is a business unit of The    and is registered as a Money Service Business with HM
Hong Kong are provided by Western Union Business
                                                                provided by Custom House ULC, a company within the             business at Tour Manhattan, 5-6 place de l’Iris, 92095 Paris   Western Union Company. Services in Malta are provided
Solutions (Hong Kong) Limited (company number                                                                                                                                                                                                               Revenue & Customs (Registered No: 12140130).
                                                                Western Union Business Solutions division.                     La Défense Cedex, France and is a branch of Western            by Western Union Business Solutions (Malta) Limited, a
1474270 and CE number BGY438) (“WUBS”).                                                                                                                                                       limited company registered in Malta (Company Number           This document has been prepared solely for
                                                                USA                                                            Union International Bank GmbH (Registration Number
WUBS is a licensed money service operator under the                                                                                                                                           C22339) with its registered office at W Business Centre,      informational purposes and does not in any way create
                                                                                                                               256184t), an Austrian company whose regsistered office
Anti-Money Laundering and Counter-Terrorist Financing           In USA, Western Union Business Solutions is a business                                                                        Level 5, Triq Dun Karm, Birkirkara By-Pass, Birkirkara, BKR   any binding obligations on either party. Relations
                                                                                                                               is at Schubertring 11, 1010 Vienna, Austria.
(Financial Institutions) Ordinance (Chapter 615, the Laws       unit of The Western Union Company. Services in the US                                                                         9033, Malta and which is licensed and regulated by the        between you and WUIB shall be governed by the
of Hong Kong). WUBS is also licensed by the Securities          are provided by Western Union Business Solutions (USA),        Germany                                                        Malta Financial Services Authority to undertake the           applicable terms and conditions. No representations,
and Futures Commission in Hong Kong to conduct Type 3           LLC (NMLS ID: 907333; MA MT license #: FT0041) (referred       In Germany, Western Union Business Solutions is a              business of financial services in terms of the Financial      warranties or conditions of any kind, express or implied,
(leveraged foreign exchange trading) regulated activity.        to as “WUBS” or “Western Union Business Solutions”).           division of the Western Union Company and provides             Institutions Act.                                             are made in this document.
You can also read