This year, central banks around the world are likely to cut interest rates, the US-China trade relationship is expected to remain fractious, and geopolitical risks are anticipated to maintain their hold on the headlines. Additionally, the world is heading to the ballot box in what is considered the biggest global election year in history. These factors point to a potential volatile currency market in 2024.

In its recent report, “Currency Management priorities for 2024”, Kantox provides corporate treasurers and CFOs with actionable measures to address upcoming challenges and opportunities in currency management. By highlighting essential focal areas, the report helps treasury and finance executives understand how to effectively manage foreign exchange (FX) risks, thereby enhancing the organization's resilience, credibility, and value.

Enhance automation, visibility and control

One of the most enduring lessons to emerge from the myriad challenges faced by treasury professionals since the onset of the COVID-19 pandemic is the necessity for increased automation in treasury operations. Specifically, in currency management, end-to-end automation streamlines the FX workflow. Nonetheless, treasury departments need more than just automation.

“They also demand a high level of visibility and control across all the phases of the FX workflow: the pre-trade, the trade and the post-trade phase”, as per the Kantox report.

To enhance automation, visibility, and control to protect profit margins and competitiveness amid increased currency usage, the Kantox report outlines six priorities:

Priority #1: Leverage currencies for growth

For corporate treasurers, the benefits of operating with multiple currencies are manifold. Buying and selling in more currencies enables treasurers to trade in the most profitable currency pairs.

Moreover, the Kantox report recommends that dealing in multiple currencies helps corporate treasury bypass FX markups charged by their suppliers or clients.

The report further reveals that embracing a wider array of currencies ensures that firms can contract in the cheapest currency or purchase goods in the currency of their suppliers, thereby reducing contracting costs.

The adoption of a broader range of currencies can also be leveraged to increase direct, high-margin sales on company websites. The Kantox report advises that this approach can also mitigate the “Credit risk in receivables by selling in customers’ currencies.”

Priority #2: Move away from selective hedging to systematic hedging

When corporations expand across borders or go global, the role of currency management becomes even more important to their bottom line, as is crucial to take a proactive stance towards FX risk management.

Consequently, as companies grow, they should abandon the practice of “Unsystematic, value-destroying selective hedging”, opting instead for systematic hedging, which is considered a more comprehensive FX risk management approach.

Because currencies fluctuate constantly, there are continual changes in the value of foreign currencies, which bring an element of uncertainty and widespread systematic exchange rate risk within currency markets.

The Kantox report advocates systematic hedging to lower the overall risk inherent in currency markets. The primary benefit of systematic hedging is that it keeps currency fluctuations within tolerable limits or a predictable range, thereby helping corporations maintain consistent pricing strategies, enhance their operational stability, and aid in forecasting cash flows more effectively.

Priority #3: Optimise forward points

“The fears voiced in 2023 about out-of-control interest rate increases are giving way to a more benign outlook for 2024, fueled by diminishing inflation expectations. Yet, for currency managers, it is interest rate differentials between currencies that matters most”, observes the Kantox report.

Moreover, Kantox reckons that these differentials create discrepancies between current exchange rates (spot rates) and forward FX rates (predetermined rate for future currency exchange transactions) known as forward points.

“When a company holds assets in a currency that trades at a forward premium to its functional currency, forward points are ‘favourable’. They are ‘unfavourable’ in the case of a forward discount currency”, the report further adds.

With the increasing possibility that most central banks will cut interest rates in 2024, interest rate differentials between currencies will likely continue to provide “A rich source of opportunities,” for companies to profit from, advises the report. In such a scenario, optimising forward points will emerge as a vital component for boosting profit margins and strengthening a firm’s competitive position.

Priority #4: Enhance exposure netting

With the impact of the 2023 banking crisis still being felt in 2024, concerns about counterparty risk aren’t expected to go away this year. In the realm of currency management, exposure netting stands out as an effective method to ease apprehensions associated with counterparty risk.

According to the Kantox report, “Exposure netting is the offsetting of commercial exposures with the same currency pair, value date and amount,” but with different or contrasting directions (buy/sell).

By employing exposure netting, treasuries can reduce the scale and expenses related to FX spot and derivate deals, and also assist their organizations in allocating less cash for collateral requirements, which is a crucial consideration in an environment of shifting interest rates.

To enhance exposure netting, Kantox encourages, “Standardising as much as possible the value-dates of forward contracts. Also, delaying hedge execution with conditional orders helps firms uncover more opportunities for netting and collateral optimization.”

Priority #5: Centralise FX management

Emphasising the growing significance of treasury centralisation, PwC’s 2023 Global Treasury Survey report states that “Specifically, very large multinational corporations have realized the benefits they can generate through scale and have moved significantly toward further cash management centralization.”

In 2023, increased centralisation within treasury was a key focal point for corporate treasuries as a part of improving cash operations. This momentum for treasury centralisation is set to accelerate in 2024, as per the Kantox report.  

The report goes on to suggest that establishing a cohesive or unified treasury unit is essential to help treasurers serve as “Generators of cash flow. This can lead to a value-adding treasury function that helps deliver consistent cash flows in excess of investor expectations.”

As treasury centralisation gathers speed, global companies should also look to centralise FX management to increase operational efficiency, have greater control over FX exposures and risks, and optimise their cash flow and working capital.

The consolidation of FX management with automated in-house FX solutions is pivotal to the strategic success of a corporation’s currency management efforts. As outlined in the report, these offer major benefits to firms, including the ability to negotiate better rates with financial institutions, enable perfect end-to-end traceability with API connectivity, enhance exposure netting at both subsidiary and group level, headquarters gaining additional expertise in currency management, significant cost savings, and improved governance.   

Priority #6: Integrate FX into liquidity management

For corporate treasury, the importance of bolstering liquidity management has become increasingly pronounced in recent years. In this respect, this year is poised to bring positive developments for corporate treasury departments, as API connectivity provides new tools for liquidity management, as explained in the Kantox report.  

APIs integrate with a variety of systems, including capabilities that vastly improve liquidity management and cash forecasting. Additionally, APIs also enable treasurers to access real-time data, facilitating prompt decision-making.

“Because API-connectivity facilitates the processes of automated FX-based pricing, exposure management and swap execution”, the report suggests that in 2024, a distinct trend is likely to emerge: technology will turn “FX management into an integral part of liquidity management.”

Moreover, integrating FX as a component of liquidity management will help in obtaining extended paying terms from suppliers, as well as aid in reducing the credit risk in account receivables, the report advises.  

To conclude, regardless of whether 2024 witnesses more or less currency volatility or whether interest rates decrease or not, the Kantox report mentions that the paramount objective for corporate treasury remains consistent with that of 2023—"Use currencies as a strategic opportunity by taking a disciplined approach to FX management.”

To effectively achieve this, treasurers must avoid operating in silos and refrain from spending valuable time on manual tasks. Instead, they should seek out tools and solutions capable of automating the entire FX workflow.

With the increasing adoption of automation, control, and visibility across all the phases of the FX workflow, Kantox believes that treasury and finance departments will be able to confidently view “Currency management as a vehicle for growth, not just risk reduction.”