How Treasurers Can Survive the Currency Wars

The big driver for currency markets over the last few years has been currency wars, notes Paul Mackel, head of Asian currency research for HSBC, speaking at the EuroFinance International Cash, Treasury & Risk Management conference in Singapore. “We have to understand what’s going on, and why.”

When countries struggle economically, they loosen monetary policy in order to weaken their currency and stimulate exports. The policy pursued by the US Federal Reserve and the European Central Bank (ECB) has “become red hot since we came out of the crisis,” says Mackel. In Asia, the currency wars are becoming more evident too, as exemplified by the sudden cut in interest rates by the Bank of Thailand.   

“You have to be thinking about who is next,” Mackel says, and “which will be the next central bank to do something radical. This nervousness is percolating through markets.”

Korea and Taiwan, for example, export similar products to Japan and Germany and are at risk of facing losses, so they could encourage their currencies to weaken. India has become more involved in the currency wars and the central bank has been increasing its stock of foreign reserves to prevent the Indian Rupee from strengthening.

China, on the other hand, is less likely to weaken its currency, Mackel adds. China is trying to enhance the renminbi (RMB) as a reserve currency and most likely it will be included in SDR at the end of the year. China’s economy as a percentage of world imports or exports is also so large that if China devalued its currency it would be a black swan event that would trigger massive competitive devaluations across the world, so the stakes are too high.

How to Avoid FX Hedging Mistakes

A panel of experts explained their practices for optimizing foreign exchange hedging.

In a poll on the accuracy of foreign exchange exposure forecasts that started off the session, 36% of respondents said their forecasts are 60%-80% accurate, 31% said 40%-60% accurate, 28% said more than 80% accurate and 5% said they are less than 40% accurate.

Jarno Timmerman, head of treasury for Akza Nobel, notes that his company focuses on the fundamentals and hedging the balance sheet, accounts receivable and accounts payable.  “The most important feature is forecasting, especially when you hedge on a net basis,” he says.

Jan Martin Nufer, director of treasury and funding for Borealis Group, agrees that exposure is the most important question. “We’re all good at monitoring. To come to the right exposure is the crucial question,” he says.

Edoardo Sirtori, head of treasury for ST Microelectronics, believes it actually depends on the type of exposure you’re forecasting. His company moved all costs and revenues into dollars, so it eliminated a lot of its FX risks. To optimize hedging, Sirtori says, “we address three types of FX risk – transaction, economic, translation. We hedge the first two, not the third due to the long-term nature.”

All three treasurers said multibank trading platforms are essential. An e-banking platform is an easy way of controlling, improving productivity, reducing the number of banks and improving pricing, Sartori explains, and it enables you to automate the whole process.  Timmerman similarly said using a system resulted in standardization, simplification, having specialists manage FX, and cost savings.

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