Cash & Liquidity ManagementCash ManagementCash ForecastingFX risks growing as volatility hits markets

FX risks growing as volatility hits markets

Uncertainty over global economy looms large, leaving firms with high FX risks

Last week, financial markets suffered losses unseen since the financial crisis of 2007-08. In an effort to assure investors, the US Federal Reserve made an emergency rate cut of half a percentage point to help stabilise the market. The US interest rate is now between 1 to 1.25 percent.

Currency volatility has spiked over the past week, with the Japanese Yen fluctuating around 0.44 percent against the dollar in February. The preceding 12 months saw just 0.24 percent of movement.

When speaking to The Global Treasurer during Kyriba Live in Las Vegas, Andrew Gage, VP FX Risk Management said that for treasurers based in the US, uncertainty looms with concerns over the spread of the coronavirus as well as the country’s elections later in the year shaking markets.

“The US economy is incredibly robust right now. But we are entering into a period of uncertainty,” said Andrew Gage, vice president of FX risk management at Kyriba Live in Las Vegas last week. “We don’t know exactly how the elections are going to pan out. We’re starting to see impact from the coronavirus. There could be all sorts of dampening effects on the US economy.

“A year or two ago, we had a relatively strong euro and so you saw more of a concentration of negative impacts on the European side. When currencies are strong, relatively to other major currencies, that’s typically where you see the concentration of FX impacts.”

US firms reported $11.55bn in negative currency impact in the third quarter of 2019 alone.

Given how many different factors affect currency, Gage acknowledged firms struggle with long term international strategies.

“In the currency markets, you really don’t look that far out. You do try to set a budget rate at the beginning of the year. But you really need to reassess your view on currencies at least on a quarterly basis, because things can change very quickly.”

“We have companies that monitor and manage their currency risk. Some companies will do it every single day, some may do it once a week and others may do it on a monthly basis. A lot of it comes down to effectively the rhythm of the business, and of the accounting rates that they use to value transactions as they’re entering into their DRP systems.”

With how fast the currency market can move, Gage added that assessing FX risks should not be limited to the treasury department but part of the board overview as well.

“You should reassess your read on the markets at least once a quarter as a part of your board preparations. ‘Over the last quarter, here’s what FX did to us. We were impacted here, going into the next quarter and next two quarters out, here’s our expectation on how come to markets are going to further affect us’.”

“This is so they can be better prepared. They’re not necessarily waiting, for the end of the quarter to adjust their hedges. They’re just revising their outlook based on what they saw and what they think is coming going into the future.”

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