Discussion LinkedIn poll | The impact of recent interest rate increases on treasury

Welcome to the second edition of this newsletter where we discuss the latest treasuryXL poll on current issues in corporate treasury. We will take you through what treasurers think about a current topic by their votes, and a couple of treasury experts will explain their views on the subject. In this edition, we discuss what treasurers should do first to control against sharp increases in interest rates.

We have invited Niki van ZantenJeremy Tumber and Vincenzo Masile ACT ICM ICA ACAMS to share their views on the topic.

25-07-2022 | treasuryXL LinkedIn |

Poll Results

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We clearly notice that the majority of the treasurers are of the opinion that the first thing to do to control sharp interest increases is to reconsider the investment strategy of excess cash. We asked a number of treasury experts to explain why they voted for the other options than for a reconsideration of the investment strategy.

Views of treasuryXL experts

Niki van Zanten

 

“Place excess cash in USD requires a holistic approach, the right time and knowledge, but if applied correctly, will manage your cash like a pro”

 

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Niki voted for the option to move excess cash to USD.

 

Treasurers want to manage certain risks, and often there is a silo approach. Liquidity risk is managed with loans and deposits, Interest risk (and returns) are managed with products such as interest rate swaps and FX is managed with FX spot, forwards and swaps. Once the incoming data (think bank balances, forecasts, markets rates) is structured, the data becomes information and is sufficient to act as treasurer with clear objectives (these are often defined in the above silos).

The next step would be to validate whether the approach meets the objectives. So, far nothing to worry about….until the market exhibits unexpected behavior. For example, a disconnect between FX swap points and underlying interest rate differentials (Jan 2015 USDCHF as a reference), or perhaps a need to optimize interest rates. In this case (and when provided time and knowledge is available), a holistic approach to FX, interest rates and cash can provide the opportunity to place excess cash in a higher-yielding currency without adding FX risk to your portfolio.

In short, it may make sense to place excess cash in USD if it does not shift FX risk or if this shift is managed by FX swaps and the pricing between swaps and deposits is compared. Again, this requires a holistic approach, the right time and knowledge, but if applied correctly, will manage your cash like a pro.

Some considerations may be to look at the efficiency of FX swaps versus deposits, as FX swaps tend to be more efficient, automation of solutions, and tracking and identifying market behavior.

 

Jeremy Tumber

 

 “Analyze how your company is exposed to the economic cycle ”

 

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Jeremy voted for the option to choose something else.

 

First, analyze how your company is exposed to the economic cycle – a study I saw in the early 2000s showed that the best position for airlines was to be 100% floatig, because their business was effectively in lockstep with the business cycle.

In theory, when an entity is part of an industry that is closely aligned with the economic cycle, it has a natural hedge for its interest rate exposure, in that it can afford to pay higher interest rates when the economy is booming, and get some relief from lower interest rates when the economy is slowing. The study I’m referring to involved a major German airline; at the time, the airline’s funding was 80% fixed, and their comments at the time were not very favorable to switching to such a large floating exposure. Fast forward 15 years, or so, and I checked their Financials. They were 85% floating at the time, so they had clearly stepped into the results of the study.

The biggest risk for them would be an extended period of Stagflation, so I hope they do well in the current circumstances!

 

Vincenzo Masile

 

“My view here is that a treasurer should take a conservative approach”

 

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Vincenzo voted for the option to move excess cash to USD.

 

Macro themes continue to drive financial markets. One does not have to look much further than the inverted US yield curve or the collapse in copper to understand that investors continue to re-price global growth prospects lower.

This is possibly because: (a) European activity is more exposed to the Russian energy supply shock and b) the U.S. economy has entered this global tightening cycle with more momentum and a positive output gap.

Inverted yield curves are typically bad news for pro-growth currencies (commodity exporters + Europe & Asia ex-Japan) and typically good news for the dollar, the Japanese yen, and the Swiss franc. This environment looks set to continue over the summer months as the Fed continues its tightening policy.

Recall that the German Bundesbank estimated that the Germany economy could take a 5% GDP hit if gas is rationed. It now appears that we are now not far from such a scenario. The pressure on European growth has caused the Eurostoxx benchmark equity index to fall 22% year-to-date, versus -20% for the S&P 500. The question will be how much more the ECB can tighten before the growth valves come down.

My view here is that a treasurer should take a conservative approach and assume that there are no large loans to be repaid to the banks, existing cash in excess should be moved to USD or to CHF or to JPY at least until the end of this year.

Sooner or later, Ukraine and Russia war will come to an end, so the cycle will reverse and EUR will become more attractive for investors and for treasurers.


Would you like to explain your own vote for this poll? Join the discussion in the comments. And above all, don’t forget to give your opinion on our latest question!

Discussion LinkedIn poll | What is the expected conclusion of crypto volatility for Corporate Treasury?

A couple of weeks ago we launched a poll on our LinkedIn page about the impact of crypto volatility on corporate treasury.

The poll received 72 votes in total, which is a great number! Thanks to everyone who joined the poll.

Scroll down to read our recap with the results and treasuryXL expert opinions. 

08-06-2022 | treasuryXL | LinkedIn |



POLL QUESTION


Currently, we see Crypto volatility crushing Stablecoins. What is the expected conclusion of these events for Corporate Treasury?

 


VOTES

              • Crypto is too risky (25x) 35%

              • We need more regulation (19x) 26%

              • Crypto is the solution (8x) 11%

              • Let’s wait and see (20x) 28%


What do our treasuryXL experts say about this topic?

 

Francois De Witte

 

 

“There is a clear need for more regulation”



It is quite clear that cryptos present a high-risk profile. The volatility is high, and it is not easy to hedge these risks. In addition, payment transactions in cryptos take more time and energy than existing payments systems like the instant payments.

Currently, cryptos are held within the blockchain and are based upon a consensus. As a corporate, you do not have a control over these assets. In addition, you do not have the stringent KYC and AML checks which you have in the classic payment systems. The KYC and AML controls occur only on the moment that an individual or a company buys cryptocurrencies with its bank account or card, or when the proceeds of the sales of cryptocurrencies are paid to their bank account.

 

For this reason, there is a clear need for more regulation. Although the 5th AML Directive covers certain crypto assets under the term “virtual currencies”, it does not provide a harmonized approach. This problem will be addressed by the proposal of the EU Commission for the Regulation of Markets in Crypto Assets (abbreviated as MiCAR), which aims to create an EU framework for crypto assets falling outside the scope of other existing EU financial regulation and is expected to enter into force by end 2024. Let’s hope that this will bring more clarity in this complex topic.

 

Pieter de Kiewit

 

 

“Let’s see what will happen”

 

 

Rejecting crypto currencies or even blockchain before fully understanding the concept is like holding on tohorse and wagon when seeing the first cars. And current inflation following the QE strategy of the ECB shows that stability is not guaranteed in the traditional system. At the same time, treasurers are there to manage risk and the current crypto landscape seems very risky. So let’s see what will happen.

 

 

 

Carlo de Meijer

 

“Without well thought-out regulation, the inherent volatility of cryptocurrencies will continue to make stablecoins vulnerable to various risks”

Regulation of stablecoins has long been on the agenda of regulators worldwide. To date, however, the crypto sector in general and the stablecoin segment in particular remain largely unregulated.

Stablecoins continue to come under scrutiny from regulators, given the rapid growth of the $130 billion market and its potential to impact the broader financial system. As stablecoins are deemed increasingly important to the system by regulators, with the potential to disrupt payment and settlement transactions.

The recent collapse of stablecoin TerraUSD (UST) and the resulting fall of Bitcoin below the $28.000 level have provided an additional argument for speeding up the regulatory process and coming up with adequate regulatory measures.

 

With a growing number of traditional financial institutions, investors and also companies entering the Crypto and DeFi market, regulation becomes urgent to prevent such collapses in the future. Buyers need to understand the risks of these algorithmically stablecoins in particular. Therefore, standards are needed.

Without well thought-out regulation, the inherent volatility of cryptocurrencies in general but also of some types of stablecoins, will continue to make these stablecoins vulnerable to various risks, and make using these instruments for treasury purposes a difficult activity. The lack of transparency about what assets are being used and whether they have enough dollars to support all the digital coins in circulation also amplifies this consequence.

 




Would you care to explain your vote on this poll? Or would you like to explain your vote in a future poll? Don’t hesitate to get in touch with us!