Extreme weather can cause fluctuations in the value of a currency, or it can drive down the worth of a business as usual levels of productivity are disrupted. This means that traders not only have to keep a keen eye on the news, but they also have to check the weather forecast. Inclement weather poses a tough challenge for investors, as its severity can often take both businesses and individuals by surprise.
However, with that challenge comes opportunity. Traders on the stock market indices may be able to identify which businesses will struggle to maintain productivity during intemperate weather, therefore, selling any of their stock in that company. Forex traders may also gain an advantage from extreme weather conditions by selling the affected currency.
Here are three examples of extreme weather that an investor should consider when trading.
Three inland floods in 2019 alone each accrued over a billion dollars in damage costs, with these unforeseen blows to government budgets naturally placing a strain on the US currency. A flood provides testing times for the agricultural industry, with the water levels affecting crops and livestock, while damage to transport networks can hinder domestic trade. These factors can drive up American prices and encourage businesses to trade with foreign companies instead, a possible boon for investors owning stock in those new prospective trading partners.
The US dollar would weaken as the trade deficit rises, so forex traders would have to adapt their position accordingly. The nature of forex trading is to sell one currency in order to purchase the other currency in the trading pair. If weather drives down the value of the American currency, it may deliver the perfect moment to buy another.
Hurricanes can cause severe damage for residential areas and industries, while the cost of rebuilding communities after such an event forces the US dollar to drop. 2005’s Hurricane Katrina brought awful devastation to the American way of life, so it inevitably had a dramatic impact on the economy. US oil production decreased by 19% and economic growth was reduced to 1.3% in the first fiscal quarter after the hurricane.
Productivity rightly takes a backseat as the threat of a hurricane looms, which means that American businesses have setbacks in the quest to meet quarterly targets. This can cause stock prices to plummet, while there is little incentive for forex traders to buy the dollar in the immediate aftermath of a hurricane.
An unseasonably warm spell takes its toll on the energy industry, as more people fire up their air conditioning units in order to combat the heat. Any change in the demand for energy is bad news for the US dollar, as it means that the country has to import more fuel from abroad. A greater reliance on imports means that there is more pressure on the dollar, so forex traders generally avoid purchasing USD during such a time.
Heatwaves can also have a direct effect on the profitability of US businesses. One hot day is suggested to reduce worker productivity by 24%, with a heatwave affecting a third of the US estimated to cost around half a billion dollars on the American economy. A heatwave is also likely to diminish consumer spending. The summer is the time when Americans spend more generously on travel and luxury goods, but this becomes difficult when disposable income is being spent on energy bills.
Identifying which companies will be most affected by extreme weather is the challenge that investors face, while forex traders have to establish which currency pairs will be most desirable at a time when the USD is weakening. Whatever the angle, it is essential that traders consider the ramifications of extreme weather on their existing portfolio and adapt their strategy accordingly.
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