On October 27, the US dollar was depreciated compared to the Canadian dollar, the euro and the yen. The announcement was made by the Bank of Canada. Tiff Macklem, the governor of the Central Bank, announced a series of measures, including keeping its key rate (short-term interest rate set by a central bank) at 0.25%. How do these fluctuations affect expats plans?
Exchange rate and inflationary surge
For Canada, inflation will not be temporary, as argued by some observers previously. On the contrary, the Bank of Canada forecasts strong and lasting inflation of around 4.45% by the end of the year.
This brought immediate reaction from the currency markets: the US dollar index dropped by 0.2% to 93.759. But the relative calm was shattered by the shock announcement from the Bank of Canada. Before this announcement, the Canadian dollar was sagging under the US dollar. This small victory for the Canadian dollar is also beneficial for the euro and the yen. However, financial analysts predict more similar movements, which should fuel the current uncertainties. Ed Moya, a senior market analyst at brokerage OANDA, expects to see "more volatility and currency fluctuations". He warns that “it will be difficult to calculate interest rate differentials for some currencies”.
Soaring inflation is worrying for some. For central banks, it is about supporting economic activity while channelling it. The markets are sensitive to the slightest announcement from a great power with statements impacting interest rates and currencies. On Thursday, October 28, the European Central Bank (ECB) chose to maintain its primary interest rate at zero. Despite galloping inflation and the economic recovery weakened by the shortage of components (particularly semiconductors), the ECB is providing support to the States.
The fight against Covid-19 involves budgets that cannot be compressed. Contrary to the prognosis of the Canadian Central Bank, the ECB does not fear a lasting overheating of inflation. Christine Lagarde, its president, is confident that "even if the current rise in inflation will last longer than expected, it should slow down over the next year". The Bank of Japan (BoJ) is as serene, although the country's situation differs from that of the other powers -- there is no inflationary surge in Japan. The BoJ keeps its key rate (-0.1%), and forecasts zero inflation for 2021-2022. The new Prime Minister Fumio Kishida has unveiled his economic stimulus plan, but with little data on its financing as yet. It is nevertheless in line with the BoJ's monetary policy.
What consequences for expatriation?
Expats and people who are looking to move overseas are directly affected by fluctuating exchange rates in various ways, including wages, property prices, loans, etc. Their income and assets can be impacted by currency risk. Negotiations of the expat salary package with employers often provide for salary compensation, training and accommodation. But future expatriates do not always think of integrating the possible devaluation or monetary depreciation. The difference is notable -- devaluation is when a monetary authority lowers its exchange rate compared to a reference value (the currency of another country, for example); depreciation results from inflation or a recession. Money loses value in the foreign exchange markets.
For example, the British Pound Sterling suffered a sharp depreciation because of the Brexit uncertainties. For expatriates, this has resulted in (in particular) a drop in income and financial insecurity.
Therefore, the main risk is to have your salary in local currency decrease compared to other currencies (the currency of your home country, for example). Expats are still working as hard but to earn less. The impact is real, especially for those who have loans, property, and those who are running a business in their home country or another whose currency becomes stronger than their local currency. Savings are also affected by these fluctuations.
According to analysts, it is crucial to anticipate as much as possible to avoid a drop in income. Make sure to have enough information on the monetary history of the country you are moving to. Has it ever experienced currency devaluation or depreciation? Does the country have political stability? In what currency will the salary be paid? Another piece of advice is to avoid transferring all of your assets to your host country. As far as possible, repay your credits in your home country, negotiate security clauses in the expat salary package (payment in net salary, annual re-evaluation of salary according to the exchange rate index, etc.).
The multiple crises of recent years (subprime mortgage crisis, Brexit, coronavirus, etc.), their duration and intensity require more caution. While a globalized economy has many benefits, it also suffers from the disadvantages of its created system. Only 2022 can confirm the optimistic forecasts of economic recovery without surging inflation, or not.
