2022 was a challenging year for corporate finance and treasury, and managing currency volatility and uncertainty is likely to dominate the list of priorities for corporate treasury and finance chiefs again in 2023. Given the ongoing trade wars, geopolitical factors and the looming recession and financial risks, currency volatility and uncertainty are not likely to subside anytime soon.

To prepare corporate treasurers and CFOs for the upcoming challenges and opportunities in currency management, Kantox’s latest report, “Currency Management priorities for 2023”, lays out the concepts and tools that will help treasury and finance professionals navigate currency exposure costs and risks while enhancing their organization's value.

Interrelated risks affect foreign exchange rates

The COVID-19 pandemic, the Russia-Ukraine conflict, the British pound ‘flash crash’ of September 2022, inflation, interest rate hikes, the climate crisis and more show the extent to which risks do not exist in isolation. They are intertwined and interconnected.

Knowing that risks are interdependent, treasury and finance practitioners need to be adequately prepared to face the interrelated nature of risks that affect foreign exchange (FX) volatility, shifting interest rate differentials, and less-than-stellar cash flow visibility, as per the Kantox report.

Priority #1: Implement the right FX hedging programme

While 2023 may deliver volatility spikes, what happens if the currency rates stay within modest ranges?

The Kantox report recommends controlling FX risks with the aid of automated hedging programmes. These programmes should include hedging invoices, aimed at “Removing the accounting impact of accounting FX gains and losses”, hedging firm sales and purchase orders to “Protect the dynamic pricing rate in each transaction”, hedging layered cash flow, and using a combination of hedging programmes to protect the budgeted revenues and expenditures.

“Currency Management is much more than currency risk management. And Currency Risk management is more than just the act of executing a hedge”, said Agustin Mackinlay, Financial Writer at Kantox.

Given that corporate treasurers and currency managers can’t always hedge against every exchange-rate or FX risk, the report asks them to “Consider the case of conditional FX orders that protect a budget rate by setting a corridor between the spot rate at the onset of the period and the budget rate itself.”

“To the extent that markets trade inside this corridor, you are still effectively managing your firm’s FX risk. And, while no trades are executed, the exposure to currency risk is very much under active management”, the report explains.

Postponing hedging execution may offer treasury netting opportunities, and that means less hedging. The other benefits of hedge execution postponement mentioned in the Kantox report include more time for treasury and currency management executives to tune up cash flow forecasts, saving on the carry in the event of unfavourable forward points, setting aside less cash as collateral, and greater opportunities to lock in favourable moves in the currency markets.

Priority #2: Optimising interest rate differentials

Shifting interest rate differentials are the sign of the times in 2023, as central banks worldwide act to combat inflation. The report reckons that corporations can optimise these interest rate differentials across the entire FX workflow in terms of pricing with a favourable forward currency rate that improves the firm’s competitive position and revenue without hurting budgeted profit margins. In addition, pricing with the forward rate also helps managers avoid excessive markups when they price with the spot rate. Furthermore, the report states that the cost of hedging can be lowered by delaying hedging execution with the help of automated conditional FX orders.

Priority #3: Tackling the problem of forecasting accuracy

Accurate cash flow forecasting is essential for corporate treasury because cash is king. With central banks fighting a war against inflation, rising global trade protectionism, slowing economic growth, and the ongoing conflict in Ukraine, accurate cash flow forecasting becomes even more important for treasury and finance professionals.

However, Kantox believes that when it comes to currency management, the importance and relevance of accurate cash flow forecasts is somewhat overstated. “To understand why this is so, consider how different cash flow hedging programs deal with this concern”, observes the Kantox report.

For companies with dynamic prices, forecasting accuracy is not as much of a concern because organizational sales/purchase orders have “close to 100% occurrence probability”, states the Kantox report.

Moreover, Kantox reckons that for organizations with steady prices during several campaign/budget periods, layered hedging programmes build the hedge rate in advance and “Are well within the normal range in terms of forecasting accuracy.”  

For firms with steady prices for an individual campaign/budget period, “Conditional orders to protect the budget rate provide managers with time to update their forecasts”, the report further added.

Conclusion: a holistic approach to currency management

In 2023, corporate treasury will have to ramp up automation efforts, adopt technology like never before, and take a holistic perspective to currency management.

To adeptly manage currency volatility and uncertainty this year, treasurers will need to avoid silos and wasting time on manual tasks. Instead, they ought to look for tools and solutions that will automate the entire FX workflow.

“API connectivity will make this possible as it allows information to seamlessly flow between company systems, reducing key-person risk and excessive reliance on spreadsheets”, advises the report.

With the assistance of the right automation tools, Kantox suggests that treasury and finance departments will be able to view “Currency management as a vehicle for growth, not just risk reduction”.