Sinking pound puts currency volatility back under spotlight

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Currency shifts significantly impact on company profits and the current volatility of sterling has pushed risk in the foreign exchange (FX) market back into the spotlight, reports Deloitte LLP.

The UK-based firm, part of Deloitte Touche Tohmatsu, surveyed 133 global corporations on the challenges of managing currency risk effectively as part of its ‘2016 Global Foreign Exchange (FX) Survey’.

The firm reports that 56% of respondents cited the ability to forecast and quantify exposures as the biggest challenge in managing FX risk.

It adds that exposures arise throughout the entire organisation and often need to be identified by interrogating multiple systems and sources. Nearly one in three of the corporations surveyed rely on three or more sources, making exposures harder to spot.

“If you can’t see it, you can’t manage it,” said Karlien Porré, a partner in Deloitte’s global treasury advisory services commented. “Without accurate measurement, value erosion from negative currency rate movements can’t be anticipated or prevented.

“As companies become ever more international, and a period of relative calm in the FX markets has turned unsettled, this is likely to have an even greater impact. Indeed the current volatility of sterling highlights this.

“Moreover, there is a tendency to focus what exposure risk information there is on just the ‘here and now’, rather than using it to shape year on year performance. Only 11% of our respondents cited managing year on year financial performance as a primary hedging objective.”

Among the survey’s other findings:

• More than a third of respondents feel that their board and executives do not receive sufficient information on FX exposure and risk management, and only 41% report tracking impact on gross margin and other profitability measures such as earnings per share (EPS) impact.
• Nearly a quarter of respondents do not monitor whether their FX risk management activities achieve the defined objectives. Contributing to the challenge of identifying FX exposures is the lack of automation with 62% of survey respondents indicating that they use manual forecasts.

“Chances are you are going to hedge less if you don’t believe the forecasts,” added Niklas Bergentoft, principal in global treasury advisory services for Deloitte Advisory. “The survey findings show a direct correlation between levels of automation and confidence in these forecasts.

“Manual information and processes cause late and unreliable forecasts. Therefore corporate treasurers need to share these challenges with executives and global teams, along with a recommendation for investment in the tools and technology to alleviate the problem.

“Conversely, boards should push back on treasurers for greater visibility into stress tests, better staple reporting and more complex analysis. Companies could be taking a hit now by not supporting the need for treasury’s roles to change.”

This year’s survey also covers the effectiveness of centralised and decentralised models, hedging strategies and transaction exposures.

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