Why Businesses Panic Hedge

Tony Crivelli
August 21, 2023

Small businesses, like any other entities, may engage in panic buying of USD or any other currency when the exchange rate is unfavourable due to several reasons. Here are some common factors that can contribute to this behaviour:

1. Lack of Expertise

Small businesses may not have dedicated FX specialists or the expertise to analyse currency markets effectively. When they see a significant drop in the value of their local currency, they may panic and believe that buying USD is the safest option, even if the rate is unfavorable.

2. Fear of further depreciation

Small business owners may fear that their local currency will continue to depreciate rapidly. In such cases, they may rush to buy USD as a perceived safe-haven currency, hoping to protect their assets from further losses.

3. Immediate Payment Obligations

Some small businesses may have immediate payment obligations in USD, such as importing goods or repaying loans denominated in USD. When the exchange rate is unfavorable, they may have no choice but to buy USD to meet these commitments.

4. Lack of Risk Management Strategies

Small businesses may not have established FX risk management strategies or hedging mechanisms in place. This lack of preparation can lead to impulsive actions when currency markets become volatile.

5. Market Sentiment

News and market sentiment can play a significant role in decision-making. If there is widespread panic or negative news about the local currency, small business owners may act out of fear without a clear strategy.

6. Limited Access to Independent Information

Small businesses may not have access to the same level of financial information and analysis as larger corporations. This limited information can lead to reactionary behaviour.

In summary, small businesses may panic buy USD or other currencies at unfavourable rates due to a combination of factors, including limited expertise, immediate financial obligations, fear of further depreciation, and external pressures. To mitigate such behaviour, small businesses can benefit from educating themselves about FX risk management and developing strategies to address currency risk proactively.

However, a final word of caution. Getting an opinion on currency from an FX salesperson can sometimes be biased, as they may have a vested interest in promoting certain financial products or services. It's essential to consider their comments alongside other sources of software driven data to make well-informed decisions about your FX risk management and currency exchange.

Subscribe to stay up-to-date!
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

get The latest Fluenccy insights direct to your inbox

Oops! Something went wrong while submitting the form.