What is Soft Currency?

Soft currency refers to a currency that is unstable and bearish on the foreign exchange market. Unstable and bearish exchange rates are often referred to as currency "weakness." In international trade, settlement in soft currency is generally beneficial to importers; in international credit, borrowing in soft currency is generally beneficial to debtors; in international reserves, it is generally not appropriate to maintain more soft currency to prevent losses from falling exchange rates. When the foreign exchange market is severely volatile, soft currencies are often the object of selling in the market. ^[1]

Soft money

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Soft currency refers to the unstable currency value,

After the Second World War, some currencies in the international financial market that did not implement foreign exchange control and could freely and infinitely exchange gold and other currencies were called hard currency, while soft currency refers to the implementation of foreign exchange control and cannot be freely exchanged for gold. And other currencies.

Difference between soft currency and soft currency

After the Second World War, some international financial markets did not implement foreign exchange control, and they could freely and infinitely exchange gold and currencies of other countries. In export business, generally try to use as much as possible during the period from the transaction to the receipt of foreign exchange. A currency that is relatively stable and trending upwards is the so-called "coin" or "strong coin". On the contrary, in the import business, we should strive to use more currencies with weaker exchange rates during the period from transaction to payment of foreign exchange, so-called "soft currency" or "weak currency". In order to reduce foreign exchange risk, using "soft coins" and "coins" in the import and export business is a feasible and effective method, but in addition, other methods can also be used: 1. Lower import prices or increase exports If the price is used as the denomination currency and payment currency when negotiating the import contract, the price may be determined by taking into account the extent to which the currency may fluctuate when we pay foreign exchange, and the import price shall be taken into account accordingly. Drive down. Conversely, if the currency considered soft currency was used as the valuation currency and the payment currency when the export contract was negotiated, the price may be determined by taking into account the extent to which the currency may fluctuate when we collect foreign exchange, and Export prices have risen accordingly. In view of the frequent changes in exchange rate, especially for a long period of time, it is difficult to predict the trend, so this method is usually more applicable to trade with a shorter interval between import payment or export collection. Second, the combination of soft coins in the international financial market, often the two currencies are soft and hard, that is, they have relativity. And often there is a situation where today is soft currency and then becomes a coin or vice versa. Therefore, the appropriate combination of multiple soft coins and coins in different contracts can also play a role in reducing foreign exchange risk. 3. Signing foreign exchange hedging clauses There are three main ways to stipulate foreign exchange hedging clauses in export contracts: 1. The valuation currency and payment currency are the same soft currency. When paying, it will be converted into the original currency according to the exchange rate of the day. 2. Pricing of soft currency, payment of coins. The unit price or total amount of the product is converted into another coin according to the exchange rate of the quote currency and the institutional currency at that time, and then paid according to another coin. 3. Pricing in soft currency. Soft currency payment determines the arithmetic average exchange rate between this currency and other currencies, or the exchange rate using other calculation methods. It is based on the change in the arithmetic average exchange rate of other currencies or other exchange rates on the day of payment. The adjustment is converted into the original currency for payment. This kind of hedging can be called "package exchange rate hedging". This needs to be agreed by both parties.