Does Your Business Need Protection from FX Uncertainty?

| 02-12-2021 | Xe | treasuryXL | LinkedIn |

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One of the most interesting aspects of what the XE Business Solutions team does is having relationships across a broad range of industries. It helps our team curate unique insights into the various pressures and financial models being used by all the businesses we work with. The relationships our foreign exchange sales consultants build fine-tune their understanding of regional business sentiment and common international best practices.

There are many viewpoints on how to treat fast-moving FX rates. Some simply hope that the market will self-correct over time. Others make best-effort forecasts to try to understand all possible currency value directions of currency prices. From our vantage point, we see that businesses which are exposed to significant risks are more likely to achieve their objectives by employing a hedging program.

Foreign Exchange Volatility is a Universal Business Challenge

Big brands are just as susceptible to market movements as any other business segment. Currency volatility can impact profit margins if not managed correctly. Earnings reports are replete with warnings to shareholders pertaining to the value of assets and cash flows being affected by unmanaged or unexpected shifts in values of currency.

Looking deeper into hedging behaviours, enterprise-level businesses have a tendency to employ rich hedging programs and while it is by no means necessary to emulate their level of complexity; certainly the point regarding ‘best practices’ is clear.

Here are some insights on how the ‘big guys’ see ForEx risks across the globe as a result of their survey of corporations (Deloitte 2016 Global FX Survey and IMP Exchange Rate Risk Measurement and Management working paper: Issues and Approaches for Firms):

The top three reported ‘Primary hedging objectives’ were defined as:

  1. Reducing income statement volatility

  2.  Protecting cash flows

  3.  Protecting consolidated earnings

In terms of strategy, the breakdown of risk management strategies is as follows:

  • 8% of those surveyed employ a static or annual hedging programme (buying once a year)

  • 31% use a rolling hedge but a flat amount (buying monthly, quarterly etc)

  • 28% actively hedge using a rolling hedge strategy increasing over time to seek to average rates

  • 33% use ad hoc or hedging by situation

The survey found that global corporate hedging strategies consist of these approaches:

  • Hedging using a financial instrument like a forward contract or option – 89%

  • Naturally hedging through balancing buying and selling in the same currency (some or all of the exposure) – 58%

  • Passing costs to suppliers or customers – 28%

  • No FX risk management practices at all – 2%

These breakdowns further:

  • Using a FX forward or Non-deliverable forward – 92%

  • Using FX Options – 30%

  • Using specifically FX Option collars – 15%

It is always interesting to get a look into the strategies employed by others and particularly the way that large, professional companies approach managing a key part of their risk program.

The key takeaway is that almost all of the companies Deloitte surveyed are hedging using some kind of financial tool specifically designed to provide consistency and protect cash flows.

Probably a much higher percentage than many would think are using Options products and rolling hedges over on a regular basis as part of a specific policy that guides them in virtually any market condition. Some real food for thought there….

Currency Market Analysis

Here is today’s market recap:

GBPEUR – The Pound maintained its position yesterday and this morning against the Euro as many traders await details on what steps Members of Parliament will take when it opens next week. Labour has indicated they will seek and emergency debate on Brexit next week but no information regarding a no-confidence vote is yet available.

GBPUSD – The pound is expected to come under pressure in general as the suspension of parliament is seen as increasing the chances of a no-deal Brexit. With this in mind, it appears likely that we could test and break the 1.2060/1.2015 level downwards, which likely will open up losses against the Dollar of some significant ground.

EURUSD – While the trading calm remains in the pair, there is a chance hard economic data will begin to outweigh hard sentiment from the ECB. Germany reported a decline of 2.2% in Retail Sales in July (on top of a downward revision). Consumption is largely propping up the German economy and this is slowing as well. A potential risk for euro weakness exists.

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