Hedging strategy divergence between UK and US corporates revealed

In the second quarter of 2024, UK corporates dropped their hedge ratios by around 6%, possibly due to increased political certainty. Meanwhile, US corporates increased theirs by 2%, according to the MillTechFX Corporate Hedging Monitor - Q2 2024.

While corporates in the UK and the US decreased their hedge tenors slightly from Q1, they are still longer than in 2023 when they were 4 and 5.5 months, respectively. This suggests they are locking in hedges for longer to protect their bottom lines from a potential return to currency volatility.

The research revealed credit availability was the top external factor influencing FX hedging decisions in Q2, while counterparty diversity is the biggest priority for Q3. Meanwhile, more corporates picked out cost as the key concern than in Q1, which rocketed from 0% in the US to 10.24%.

These three factors are inextricably linked. Many corporates struggle to access credit from their existing providers, who seemingly have tightened criteria, while others report increasing prices, forcing them to shop around for better deals from new counterparties.

Looking ahead, there will be several important factors corporates will need to consider in the coming months. In early August, there was a huge selloff in global stock markets which saw the VIX, a gauge of stock market volatility, skyrocket by as much as 42 points, the biggest one-day spike since 1990. This is already impacting the FX market with Deutsche Bank’s FX volatility gauge increasing to its highest level since May 2023.

Interest rate divergence is also likely to move currency markets. In July, the Bank of England cut its interest rate, following a similar move by the ECB, while the Fed continues to hold rates. If this path continues, we could see both EUR/USD and GBP/USD fall as the yield benefit of higher interest rates makes the Greenback more attractive to hold.

 

Expansion in Australian business activity driven by services

Business activity in Australia’s private sector returned to growth in August, underpinned by rising services activity. Overall new orders also rose while employment growth accelerated alongside increasing business confidence. Meanwhile, selling price inflation eased despite average input costs rising at the fastest pace since March 2023.

The Judo Bank Flash Australia Composite PMI Output Index rose to 51.4 in August, up from 49.9 in July. Rising above the 50.0 neutral mark, the latest data signalled that business activity returned to growth after falling fractionally in July. The latest upturn was the fastest in three months, driven by increased services activity growth despite manufacturing production contracting faster.

Total new orders rose for the first time since May. However, a divergence in sectoral trends was present with rising services new business contrasting with another reduction in goods new orders. The opposite was true for export orders, however, where higher overall new business from abroad was underpinned by improvements in manufacturing export demand.

Employment levels rose due to the uptick in new work and activity. This was again exclusive to the service sector, though manufacturing staffing levels stabilised after falls seen in June and July. With higher workforce capacity, the level of unfinished business fell across the Australian private sector for the twenty-sixth month in a row.

Higher raw material, transportation and labour costs meanwhile led input prices to rise at the fastest pace in 17 months. In contrast, the rate of output price inflation softened to the slowest since January as firms opted to lift prices at a weaker pace in an effort to boost sales.

Finally, business confidence in the Australian private sector improved in August. While still below average, optimism levels rose across both the manufacturing and service sectors in the latest survey period.

 

Switzerland launches instant payments

Instant payments were launched in the Swiss market this Tuesday, 20 August. Around 60 financial institutions can now receive and process instant payments, covering over 95% of Swiss retail payment transactions. All financial institutions active in retail payment transactions will be reachable by the end of 2026 at the latest, according to the Swiss National Bank. The first institutions have already launched retail offerings enabling customers to send instant payments. In the coming months, further banks will announce similar services.

Instant payments allow companies and private individuals to perform account-to-account transactions with immediate execution and final settlement in seconds – 24 hours a day, seven days a week, including public holidays. This offers significant advantages for individuals, companies and commercial banks. Thanks to shorter settlement chains, risks are reduced and funds received are available immediately. For companies and commercial banks, instant payments expand opportunities for automating processes and linking with other services.

Traditional transfers will still be possible. The Swiss National Bank and SIX Interbank Clearing anticipate that instant payments will likely become established in Switzerland in the medium term and form the basis for further innovation in payment transactions.

The technical framework for this new type of payment was established with the successful go-live of the new generation of the central Swiss payment system in November 2023.

 

Minerva Foods boosts global sales by improving working capital

Minerva, a South American beef exporter, sought to enhance its management methods to capitalise on growth opportunities while maintaining high standards in productivity, quality, and food safety. As the company expanded globally, it recognised the need for more efficient working capital management, with a particular focus on account receivables, which represent 75% of its operations. 

The manual processes used by the treasury and export teams for tasks like invoice discounting and risk mitigation were time-consuming and prone to errors. To improve cash flow and operational efficiency, Minerva sought a solution that integrated cash management and receivables discounting, enabling earlier payments and reducing payment risks for its global buyers.

Minerva implemented a receivables discount solution offered by J.P. Morgan Payments that enhances the company’s receivables programme and connects to its enterprise resource planning (ERP) system for better cash management. 

Through the programme, which went live in June 2023, Minerva has discounted more than 4,000 sales invoices from clients across countries in Latin America, Europe and Asia in the first eight months. It also reduced Minerva’s receivables maturity from 60 days to two days.

Improving working capital helped Minerva improve efficiency and increase its available cash for business operations and growth. This prepared the company to complete its largest acquisition to date, which will increase its production capacity by nearly 50% by late 2024.

In addition, because the solution from J.P. Morgan Payments is paperless, it significantly reduced the amount of work for Minerva’s treasury team. This eliminated the need to submit thousands of invoices and helped to increase global sales. Now, Minerva’s treasury and export teams can focus on more strategic tasks.

 

Treasury Prime adds AI-powered compliance to its bank network

Embedded banking software company Treasury Prime has announced the addition of Kobalt Labs, an AI-powered copilot for risk and compliance teams, to its partner marketplace. Banks in the network now have the option to use Kobalt Labs to manage their third-party diligence with AI, including the ability to streamline legal, compliance, and infosec diligence in one platform.

“Compliance costs are a big consideration for banks as they weigh the investments associated with embedded banking. By partnering with Kobalt Labs, we’re enabling our bank clients to access new capabilities for third-party risk management compliance as they scale their BaaS programmes,” said Kyle Costello, Head of Partnerships at Treasury Prime. “Risk, compliance and infosec teams will now have a solution that auto-surfaces any gaps in vendor documentation and contracts, and keeps internal processes auto-compliant.”

Kobalt Labs aims to modernise and strengthen the entire third-party diligence flow for banks and fintechs. The platform is synchronised with every existing financial regulation, regulatory guidance, and security standard, and it can conduct thorough checks on any external documentation against these regulations within minutes. The platform also automatically integrates with business intelligence sources and surfaces details on beneficial ownership, financing history, negative news, and recent lawsuits and enforcement actions.

Additional capabilities within the Kobalt Labs platform include an infosec module that extracts relevant security information and suggests relevant next steps to streamline review and a legal module that instantly identifies missing clauses and risky language in agreements.