FX volatility: what does this mean for the charity sector?

The COVID-19 pandemic has created volatility in the financial and forex (FX) market, presenting a significant risk to charity funding.

In fact, the INGO FX Insights Report 2021 found that 55% of international charities shared concerns regarding currency volatility, with 51% stating that a 1-5% FX movement would cause them serious financial difficulties.

Why is the FX market facing issues?

Throughout the COVID-19 pandemic, the FX market has been experiencing heightened levels of volatility and thinner liquidity.

Factors such as the fall in GDP during lockdown, interest rate cuts, increased unemployment and foreign travel bans have all weakened GBP.

However, the excessive volatility in the FX market is a result of wider global economic uncertainty caused by immense disruption.

How has the FX volatility impacted charities?

As only 7% of charities have been able to access the Government’s emergency fund during the pandemic, there’s no room for money to be lost on international payments.

However, the response to FX volatility has been primarily reactive, highlighting a major gap in planning from the charity sector.

Only 11% of charities have had FX risk management strategies prior to the crisis, resulting in 43% having to absorb loss on currency exchange by using unrestricted funding.

How can charities manage FX volatility?

Smaller charities can use cashflow forecasting, cautious cash management or staggered FX transactions.

Other potential measures include sending funds overseas monthly rather than six-monthly or annually and holding foreign currency in foreign currency bank accounts (often in the main hard currencies) to create a natural hedge.

As for larger charities, they have the option of forward FX contracts that allow them to fix a price today for future foreign exchange, mitigating part of the risk.

How can charities tackle the complications surrounding FX transactions?

In the INGO FX Insights Report 2021, 51% of respondents cited their main issue as understanding FX transaction costs, with 33% stating that they could not accurately calculate the costs of their international payments.

To tackle these challenges, charities need to adopt a data-driven approach to managing their budget exchange rates and annual cashflow budget.

This approach enables a full-proof way to manage FX transactions, mitigating the use of unrestricted funding to absorb any shortfalls.

How can IRIS help?

To find out how IRIS can help your charity manage and reduce the risk to your funds from foreign currency exchange, please get in touch or alternatively, check out our next-generation solution, IRIS Financials.