Each time a new year dawns, the outlook for global currencymarkets brings new foreign exchange concerns to light amidprojections of looming geopolitical, economic, and social events.For 2019, we can predict many events that we might reasonablyexpect to affect the U.S. dollar, including Brexit, Italy's budget crisis, and the added uncertainty in the European Union (EU) asa result of Angela Merkel's decision not to seek re-election.However, 2019 will undoubtedly also bring unexpected events, whicharen't necessarily related to a specific country or currency andwhich will catch the market by surprise. In addition, some eventsthat we may expect to happen will end up having unexpected impactson currencies.

Corporate treasurers and financial risk managers need to bepreparing now for events in each of these categories. The eventsthemselves may not necessarily be good or bad, but any organizationthat fails to prepare for their effects will likely end up gettinghurt in the fallout.

Here are some currency-impacting events that every companyshould be preparing for with the start of 2019:

Expected Events with Fairly Predictable Currency Impacts

Democrats' takeover of the U.S. House ofRepresentatives.  The recent results of themidterm elections are certain to impact the U.S. dollar (USD) in2019, and in some fairly predictable ways. With a divided House andSenate, U.S. markets will be more sensitive to swings in thepolitical climate. Additional tax cuts—which sparked a rise in thedollar in 2018—aren't as likely in the new era of dividedgovernance. The White House may also have more difficulty in 2019getting Congressional support for its call for additional economicexpansion, which was another driver of the dollar's rise last year.Thus, many market watchers expect the dollar to weaken throughout2019.

The looming Brexit deadline. As the March 29 Brexit deadline draws nearer with no approved exitplan in place, uncertainty continues to grow. Even if Brexit isdelayed beyond March 2019 and the United Kingdom strikes a deal totemporarily remain in the EU single market, the British pound (GBP)is expected to continue to fall against the euro and USD.

Recent talks of Britain's ability to withdraw its Brexit noticecould change this. If Brexit is reversed, investor concerns will beeased, most likely leading to a spike in the GBP.

Italy's budget crisis.  Afterhaving its 2019 budget rejected by the EU, Italy continues to pushfor additional spending that would increase the country's debt.This rift within the EU adds to the uncertainty of the euro.Volatility is sure to ensue in 2019, as Italy deepens its debt,placing a financial burden on other member states.

The impending end of Merkel'sreign.  After German Chancellor AngelaMerkel's October announcement that she will not seek re-election,the euro slipped against the USD as investors and the generalpublic questioned who will replace her. The longest-serving leaderin the European Union, Merkel made the announcement at a time whenthe EU's future is unclear amid the U.K.'s exit date and theItalian turmoil.

With so many EU-based political events culminating in 2019, it'sreasonable to expect the euro to be quite volatile this year. Inparticular, Merkel's decision to step down is expected to havenegative impacts on the euro, since Germany is a dominant player inthe Eurozone.

The fragility of Middle East stability, and aspotlight on Saudi Arabia.  The UnitedStates' withdrawal from the Iran nuclear deal and recentreinstatement of sanctions against that country have added toIran's mounting economic challenges, which will likely furtherimpact the already depreciating Iranian rial (IRR).

But Iran isn't the only Middle Eastern country battling eventsthat could greatly impact its currency in 2019. Saudi Arabia ismanaging growing concerns over its political stability followingthe death of exiled Saudi journalist Jamal Khashoggi. U.S. senatorshave backed a resolution to end support for the Saudi-led war inYemen, which would effectively cripple the U.S.-Saudi relationship.Because the majority of Middle East currencies are tied to the U.S.dollar, they will likely move up and down with the USD and indirect negative correlation to the euro.

Expected Events with Unpredictable Currency Impacts

The introduction of a digital dollar. The United States is working toward the adoption of acrypto-dollar. Goldman Sachs and other large financial servicescompanies are now backing startups that are working to roll out adigital version of the USD pegged to the currency. These firms'support for the idea suggests it is only a matter of time until thecrypto-dollar is a reality. In fact, this new digital currency mayvery well be introduced in 2019. If it is, it would have materialimpacts on the currency market—but what those effects would be areanybody's guess.

Digitalization of financial institutions around theworld.  This year, financial institutionsand governments will take large leaps toward global digitalization.Both banks and governments are rethinking how they interact withconsumers and businesses, increasingly turning to the digital stageand focusing on the move toward digital currencies and technologiesthat prioritize digital transactions with consumers.

The cost structure of most banks today is not sustainable ifpayments and other business interactions are carried out digitally.Traditional institutions with physical locations have higheroperating costs and more overhead compared with digital-firstbusinesses. And digital-focused financial services firms often passthese savings on to consumers, taking them off the hook for minimumbalances and charges such as direct deposit fees.

The move toward digitalization is making traditional banks lessand less competitive in comparison with those institutions andgovernments that are investing in technology. This means thelandscape is changing for the ways in which companies interact withtheir banks. As this happens, the move toward digitalization couldimpact currency valuations, counterparty risks, and paymentstructure.

Fundamentally, the antiquated process for global cash transfershas always created a risk, as most transactions are settled withintwo business days. Digitalization removes that and the associatedcounterparty risk from the equation.

Currency valuation impact comes into play as global currencyleaders with liquidity race to release a digital currency. If, forexample, Japan comes out with a digital currency 12 to 18 monthsbefore the United States, there would likely be a shift in valuetoward the yen.

Such disruptions will impact the financial markets in ways wecan't anticipate. They will likely create volatility in currencymarkets, but we have no sure way of knowing when that volatilitywill occur or how corporations will be impacted.

Unknown Unknowns: A Few Possibilities that Could HaveUnpredictable Market Effects

The killing of influentialpeople.  A Turkish court has accepted anindictment for the 2016 assassination of a Russian ambassador. Morerecently, Jamal Khashoggi's death sparked international outragetoward Saudi Arabia, and a nerve-agent attack in Salisbury,England, on a former Russian spy and his daughter led to EU andU.S. sanctions against Russia.

These events beg the question: When and where will the nextpolitically motivated assassination (or attempted assassination)happen? Such attacks on influential figures will probably continue.And each new incident has an impact on international relations—and,consequently, on the currency markets. However, because we have noway to predict future actions that will lead to internationaloutrage, we have no way to determine the effects those actions willhave, or the level of volatility they will create in specificcurrencies.

The trade war between the U.S. andChina.  The U.S.–China trade war has been one of thegreatest shocks to global growth of the past year, and the conflicthas the potential to materially disrupt supply chains in 2019.While the recent truce between Trump and Xi has eased thetensions to some degree, uncertainty remains high. Many supplychain managers know the trade war could ratchet back up at anytime.

If new tariffs, or the potential for new tariffs, do begin todisrupt companies' U.S.–China supply chains,what will that mean for other markets? It's difficult to know.These tariffs come at a time when China has more trade to lose,meaning the business position of the United States wouldstrengthen, and consequently so would the U.S. dollar.

Impacts on other Asian countries—and currencies—are likely butunpredictable. However, with the dollar and yuan heavily dependingon the trade relationship between the two countries, new tariffswould likely mean that the weakened state of the Chinese yuan willstay, counteracting in small part only the negative impacts of U.S.tariffs.

Other issues.  By theirnature, the “unknown unknowns” are impossible to predict.Assassinations and trade disruptions are two examples of areas inwhich unexpected events are likely to affect global currencies in2019, but we will undoubtedly experience many other types of eventsthat also have currency impacts. What corporate treasurers can knowwith certainty is that even the events we can't see coming maygravely impact currencies and companies dealing in foreignexchange.

How to Prepare for Currency Volatility

Foreign exchange volatility is likely to gain momentum thisyear, as both domestic political and geopolitical tensions continueto mount. Many of 2019's currency swings will be impossible topredict in advance. Still, organizations can approach currency riskstrategically, preparing for the unexpected rather than simplyreacting once it happens.

In order to be strategic, corporate treasury teams need tounderstand not only how currencies are impacting their financialstatements, but also how they can offset exposures and mitigatepotential impacts. Technology tools that include businessintelligence, artificial intelligence (AI), and interactivereporting can deliver insights on both counts. Businesses thatadopt such “intelligent” technologies are better equipped todevelop more sophisticated currency-management processes.

Companies also need to look at their workforce and evaluatewhich employees have the fundamental skills needed to prepare forand mitigate currency volatility and risks. Data scientists with asolid foundation in finance will be highly sought after this year.They will play a vital role in supporting the financeorganization.

Employees without these fundamental skills need to be trained innew ways they can add value. Most companies need to be investing inthe continuing education of their finance workforce. Similar to there-education of large parts of the workforce during the industrialrevolution, employees who are executing repetitive processes todayshould be investing in their future. The material acceleration ofrobotics, AI, the Internet of Things (IoT), and evenbiotechnology is changing the world rapidly, in what has beendeemed the “fourth industrial revolution” or the “second machineage.” It is imperative that companies and their workforce preparefor this.

These technology and process advancements will enableorganizations to better understand how their company may beaffected and to prepare themselves for any event that will impactthe currency market, be it expected or unexpected.

Wolfgang Koester isthe CEO and co-founder of FiREapps. He has more than 30 years ofextensive experience in currency markets and working with numerousglobal Fortune 1000 companies and government entities. Koester is afrequent speaker at industry and academic events, and his work hasappeared in The Economist, The Wall StreetJournal, Financial Times, Treasury & Riskand AFP Exchange, among other industry publications.He is a regular commentator on CNN, CNBC, Fox Business, andBloomberg.