There are a multitude of factors that influence the value of currencies –- from rising political tensions, wars, major economic policy announcements, civil upheaval, and foreign trade to confidence in government. One consideration which is often overlooked is the potential effect of natural disasters. Floods, tornados, wildfires, earthquakes, and hurricanes not only put a country’s citizens in peril, but its economy as well. In turn, the fallout from a climate event can induce foreign exchange turbulence on its currency.
The foreign exchange market is the largest and most liquid financial market in the world, with an estimated trade volume in excess of US $5 trillion daily. A given currency’s exchange value is largely derived from the economic strength of the country or region to which it belongs. The interconnectedness of markets today and increased export dependency of economies makes forecasts and speculation pertaining to economic output a primary indicator of this strength.
Infrastructure and an able workforce are undoubtedly the backbone of every economy. Damage to critical infrastructures such as fisheries, agriculture, factories, roads, and airports can severely compromise production capacity and economic strength. They can sever or disrupt critical tranches in a value chain, compromising national industries and sectors of economic import for an extended period of time. This is often compounded by a displaced workforce and an associated cycle of low consumer spending. Furthermore, capital and private expenditures for clean-ups and rebuilds will often come at the expense of investments in economic growth-related development projects or involve significant borrowing and further accumulation of debt. A weakened currency will increase the costs of imported repair materials and the ability of industry to settle debts and purchase import commodities and services.
ForEx Volatility Can Kick an Economy When It’s Down
Some economies are of course more vulnerable to climate catastrophes than others. Sub-Saharan African nations are becoming increasingly vulnerable to drought. The interlocking challenges of rapid population growth and an increasingly unstable climate in these regions will put their economies under tremendous pressure. And ultimately, this will reverberate back into the value of their currencies. This will, of course, hamper their ability to settle debt obligations and purchase foreign commodities, which can delay the path to economic recovery, initiating a vicious cycle of economic vulnerability.
Typically, in the days preceding and in the immediate aftermath of a climate event or rapid-onset disaster, linked currencies will weaken as uncertainty around the extent of damage prevails, such as the case of the earthquake that shook Japan in 2011. The Yen then vacillated between ¥76.25 and ¥79 against the dollar as remittances and foreign insurance payments flooded in. Infrastructure was severely damaged by the severe weather and the JYP immediately weakened, as international investors awaited for further news assessing the damage. Similarly, in 2017, Storm Harvey, the largest hurricane to hit Texas in 50 years disrupted crude oil production across key refineries in the area. That paired with fears of impending central bank rate hikes, sent the U.S. dollar plummeting to its lowest exchange value in 16 months against a basket of major currencies and a more than 2-1/2-year low against the euro, according to Reuters.
Highlighting the Failings of Fiat Currency Infrastructures
Fiat infrastructures such as banks, ATMs and transfer agents can be rendered inaccessible to citizens in the aftermath of climate disasters, often for prolonged periods of time. In response to this, cryptocurrency deployment has been trialed by the likes of Oxfam in its ‘Unblocked Cash’ initiative to support relief responses in communities in Vanuatu, which is the world’s most at-risk nation to natural disasters such as tsunamis, earthquakes, storm surges, coastal flooding, landslides, cyclones, and volcanic eruptions. Remitting funds via crypto shows great potential in helping victims of such catastrophes to promptly receive funds from friends and relatives or donations from government or the wider public. However this use of the technology does little to address the volatility that their national currency, which ultimately holds the savings of citizens, may endure as a result of the economic devitalization caused by natural disasters.
Stablecoins as a Solution to ForEx Volatility
As we have seen, fiat currency volatility can act against the best interest of a country, ‘kicking an economy when its down’ and impeding recovery efforts. In an age of increasing interest in digital currencies, we have seen much commentary on the utilization of digital assets as safe-havens in times of turbulence, political or otherwise. And many individual investors who are disillusioned with the failings of fiat infrastructure have invested in this asset class. However, many floating cryptocurrencies are subject to much volatility and price manipulation, making them unconducive to value safe holding and more suited to speculative investing.
A cryptocurrency with a non-correlation to political affairs or short and medium-term market volatility, offers the potential to reshape the monetary paradigm by offering a value conservation solution for investors. Some experts believe that next-generation, algorithmic stablecoins could be the answer – in pegging value to global economic growth, instead of merely the economy of one country or economic zone, an algorithmic stablecoin could potentially offer a harbour of stability in turbulent times. In the case of a natural disaster, the stability mechanisms of algorithmic stablecoins could help safeguard the value of the savings of citizens in a given country, and could ultimately help their economy get back on track.