Exchange rate volatility is one of the main challenges for those who operate or invest in emerging countries. This phenomenon, caused by abrupt variations in exchange rates, directly affects costs, revenues, cash flow and even the competitiveness of companies operating internationally.
In this article, we’ll explore:
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In emerging markets, there is a combination of structural and cyclical factors that increase exchange rate risk. Issues such as dependence on commodities, fiscal and trade deficits, as well as political instability, are constant in these countries.
Another aggravating factor is the lower liquidity of local markets. In other words, any inflow or outflow of capital, even if relatively small, can generate sudden movements in exchange rates.
The South African rand (ZAR), for example, often suffers sharp devaluations at times of global tension. This happens even if local fundamentals remain stable.
In addition, emerging countries tend to have lower international reserves and higher external debts. This combination reduces the ability of central banks to intervene in times of stress.
An emblematic case is that of Egypt. In 2023 and 2024, the country faced a sharp devaluation after losing more than 40% of the value of its currency due to a shortage of dollars and high foreign debt.
Among the external factors, US monetary policy has a huge influence on emerging countries. When the Federal Reserve (Fed) raises interest rates, American assets become more attractive, stimulating capital outflows from these markets.
This movement puts direct pressure on local currencies, which tend to depreciate rapidly. This is exactly what happened in 2022, when the Brazilian real lost strength, even with commodity prices at high levels.
Another relevant factor is geopolitical tensions, such as the trade dispute between the United States and China. In addition, events such as elections in major powers often cause uncertainty in the markets.
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Volatility is not just a theoretical concept: it actually has a direct impact on companies’ operations. Without proper risk management, exchange rate variations can erode margins, generate additional costs and affect cash flow.
For companies that depend on foreign currencies, this translates into significant challenges. The lack of exchange rate predictability hinders not only long-term planning, but also day-to-day operational decisions.
In addition, the perception of country risk has a direct impact on the confidence of foreign investors. When there is no efficient risk control, the cost of raising funds rises, as does the difficulty of accessing international credit lines.
In practice, there are two main types of risk for companies operating in emerging countries:
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Managing exchange rate risks is essential for any company exposed to international markets, and this applies to large corporations as well as small and medium-sized ones.
The first step is to understand how the company’s operating cycle connects with its foreign exchange exposure. Based on this diagnosis, it becomes possible to adopt a formal risk management policy that aligns with the objectives and needs of the operation.
The main tools include:
In addition to financial instruments, geographical and currency diversification has emerged as an important practice. This strategy allows companies to be less exposed to the fluctuations of a single economy or currency.
It’s also worth noting that there are already more accessible alternatives for smaller companies. Brokers and specialized fintechs offer contracts with reduced minimum values and, in some cases, make hedging possible through consortia between companies in the same sector.
Another approach is to look for a so-called natural hedge, which consists of balancing income and expenses in the same currency. For example, an exporter can dollarize part of its operating costs, reducing its dependence on the local currency.
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The currency crises that have affected countries like Nigeria, Egypt and Argentina in recent years have taught us important lessons. One of them is that risk management should not only be triggered when the exchange rate has already skyrocketed.
Companies that maintain an active currency hedging policy, even in times of lower volatility, manage to preserve their financial health. What’s more, they increase their competitiveness in foreign markets.
On the other hand, common mistakes are still observed in the market, such as:
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Understanding the risks of exchange rate volatility and, above all, knowing how to mitigate them is essential for companies’ financial health and competitiveness. A good hedging strategy allows managers to plan and make safer, more predictable decisions.
And if quality information makes all the difference in this process, Hedgepoint HUB is your greatest ally. Our platform brings together in-depth analysis, up-to-date data, economic scenarios, commodity insights and much more. Turn knowledge into competitive advantage!
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