Timing the forex market – can it be done?

Bianca Botes, Treasury Partner at Peregrine Treasury Solutions

It’s true that the forex market never sleeps – there’s always someone trading currency somewhere around the globe at any time of the day or night – but are there optimal times when one can benefit from transacting?

Absolutely! When buying or selling forex, timing is often crucial. But there are other aspects to consider as well in order to maximise operational and financial efficiency.

There are certain elements that will determine the timeline of a foreign exchange transaction, including payment terms, cash flow and market conditions. However, we find that more often than not, it becomes a subjective decision based on one’s emotions, prevailing market sentiment and limited information one has access to. 

While it is impossible to predict the forex market with 100% accuracy, there are certain tools that importers and exporters can make use of to avoid falling in to the subjectivity trap: 

1.     Fundamental factors: these include considerations of aspects ranging from the economic performance in both countries (that of the currency being bought and sold) to utterances by politicians and market sentiment.

For example, when South Africa’s dismal first quarter 2019 economic performance was published earlier this month, the rand slumped by 1% almost immediately. By contrast, an announcement by President Ramaphosa that he would be tackling the Eskom crisis head on boosted the local currency by nearly 2%.

By being aware of and observing the fundamentals, importers and exporters will have a better understanding of the underlying trends and directions that currency movements can be expected to take.

2.     Technical levels, often referred to as support and resistance levels, are calculated based on historical market data: this involves studying historical forex movements and patterns to determine potential future moves. The signals that technical analysis provides would indicate when to buy or sell a currency based on the move and the strength of that move.

This can also give rise to algorithmic trading whereby a formula will be used to determine when to buy and sell forex based on a set of rules and conditions in the market, such as time, price, volume and so on.

3.     Having a risk policy: by setting out clear rules regarding the management of risk one can ensure that it remains an objective transactional event, instead of an emotional subjective decision. Obviously, with international transactions, currency risk comes to the fore and none more so than with the rand.

South Africa boasts a highly liquid, but small, forex market making the rand a decidedly volatile currency. This brings certain hazards for those needing to deal in forex and these risks can be mitigated through proper management. You could, for example, define the size of trades upfront, and decide if you are going to hedge your exposure and how – such as through currency futures or forwards.

Combining these three elements can often be a hard ask from a financial director, a CFO, or a financial manager as it is not their core function. At the same time, they would still need to focus on managing the overall financial health of the business.

However, assuming that timing the forex trade has been confirmed and decided on, the execution can often also hold many unexpected pitfalls. These elements include:

a)     Liquidity: thin or low liquidity can often result in liquidity premiums, driving up exchange rates and cutting into the profits of a business. This poor liquidity can be a by-product of inopportune market timing – the optimal times to trade are when the markets are busiest and the buy and sell spreads are at their narrowest. It’s also at these times when market makers are less active (there is less profit available for them), leaving more room for importers and exporters to effect genuine deals.

In general, this means that during normal business hours, better rates will be available, although currency can be traded around the clock if needed.

b)     Margin: the mark-up charged by forex traders can often result in inflated forex costs for a business. This means it pays to shop around and seek out a trader who will function in your best interests.

c)     Products: failing to select the optimal product to transact – such as spot, forwards or derivatives – can also have negative implications for an organisation, so be sure that you have chosen the best products to suit your requirements.

It is clear that both timing and execution can easily become treacherous terrain for importers and exporters. The foreign exchange market is not only volatile but also tends to lack transparency when it comes to fees, costs and alternative options available.

It is worth making sure that you have a trusted partner for forex deals and ensure that the crucial mix of competitive pricing and execution efficiency are part of their offering in the volatile forex environment.

Managing your forex efficiently can lead to reduced costs, increased profitability and overall improved business efficiency.