Finally, we are also seeing an increase in the number of semi-floating or freely floating currencies, the Chinese yuan being the latest example. Debt and earnings in these currencies are subject to FX fluctuations.

In summary, corporations are significantly exposed to FX volatility via their revenues and debt at a time when world GDP is itself disproportionally feeling the effects of the FX factor. And if the FX factor has a significant impact on corporate earnings and leverage ratios, then it may in turn affect the performance of the securities issued by these corporations. In this way, the micro can influence the macro as the FX factor may have an indirect impact on the wealth effect and financial conditions.

This business-based, micro perspective offers another view into why FX in The New Neutral is an endogenous factor influencing the financial system – a factor to be taken seriously, indeed.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.