Hedging strategies are central to managing FX risk but the uncertainty of global politics, together with the move to automated systems and changes in banking relationships have shifted the goal posts.
1. Lack of FX visibility
Together with cash flow forecasting, managing financial and FX risk is the main focus for corporate treasury. As any FX risk consultant will tell you, the key steps in FX risk management is to first, define and understand your foreign exchange exposures and, secondly, ensure you have access to quality data flows on each exposure. These seem like steps all corporate treasuries would naturally take but getting that quality data is one of the key sticking points.
This was shown in last year's Global Foreign Exchange Survey by Deloitte, which highlighted one of the main problems for corporates in managing FX risk: a lack of visibility of actual exposures. The survey found that nearly 60 per cent of respondents cited this as one of their main FX challenges. The problem arises when companies use multiple sources of data on FX exposures and don't have real-time integration to maintain data quality. Many companies also still use manual processes to collect and analyse data. The report found that 56 per cent of corporate treasurers said that a lack of visibility of FX exposures and reliability of forecasts was the number one overall treasury challenge.
2. Politics drives volatility
Volatility in FX markets has been haunting treasurers for several years now, with currency instability mainly a result of unexpected political events. As one FX strategist put it, “Politics is the new economics”. This is a big shift that corporate treasurers and FX risk managers should have adjusted to by now. It's no longer adequate to study just the economic indicators to hedge currencies: we have to understand wider political developments and prepare for the unexpected. HSBC's Stephane Knauf and Rahul Badhwar write in this article published in TMI: “...rather than simply analysing forecast economic data and taking a view on currency direction, treasurers need to be prepared for repricing following major announcements followed by the currency trading at new levels for an indefinite period.”
The new FX environment has brought added complexity for corporate treasurers. Who knows what 2017 will bring but the current strength of the US dollar, set against the continued uncertainty of the Trump administration, are creating the conditions for more dollar volatility.
3. All eyes on FX banks
But in FX, it's not just what the corporate treasurer thinks about exposures and political events that counts; treasurers also need a solid grasp on the FX services provided by their banks. This blog by Joseph Neu, published on Thomson Reuters, discusses how corporate treasurers evaluate their FX banks on trade pricing and performance using score cards. Neu writes: “Monitoring performance and sharing key metrics is common, but qualitative evaluations of items like post-trade settlement efficiency can lead to significant wins in bank-service levels as well as trade execution performance.” Keeping track of FX bank performance will help the treasurer to benefit from better service levels and banks fees, which may not seem like the key component of effective FX hedging, but every cent helps in volatile times.
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