Why FX needs more focus in Asia

In the wake of foreign exchange (FX) rate volatility this year and high FX costs, it might seem that corporates would be doing more than ever to manage FX better.

The Japanese yen (JPY) was up 20% against the dollar for 2016 as of mid-September for example, and the decision by the Bank of Japan (BoJ) to keep the benchmark 10-year Japanese government bond yield at zero raises questions about what comes next. For China, Scotia Bank forecasts that the renminbi (RMB) will gradually return to global investors’ radar screens once the International Monetary Fund (IMF) includes the RMB in the special drawing right (SDR) mechanism from October.

Along with currency volatility, hidden FX costs can be high. Corporates or their customers still often pay high FX fees for multi-currency processing for ecommerce, for instance, or for cross-border remittances. Mark-ups can be several hundred basis points.

The impact of FX can be huge. Deloitte found in its 2016 Global Foreign Exchange Survey that the surge in the US dollar in 2015 wiped billions off the earnings of US organisations and fuelled increased cross-border merger and acquisition (M&A) activity.

Despite the large impacts, many corporates seem relatively under-prepared. On a global basis, Deloitte said, nearly 60% of corporates have a lack of visibility into FX exposures and use manual processes to quantify FX exposure. Manual forecasts and the under-utilisation of treasury systems in the FX management processes cause additional challenges.

Many corporates also use fewer tools to manage FX risk than perhaps they should. Research and analysis firm East & Partners found that only 25% of small businesses in Australia, 37% in Hong Kong and 46% in Singapore use forwards or options. While East & Partners head of Asia Amit Alok did note that high level of cross-border trade, multicurrency cash management and increasing usage of regional treasury centres are driving greater usage of forwards and options among businesses in the region, usage is still relatively low

New solutions

While current processes may be sub-optimal and costs can be high, new solutions that are less expensive and easier-to-use are on the way. As HSBC managing director Gareth-Lloyd-Williams observed recently in GTNews, FX management has been an area in which innovation has flourished over the past decade, including the evolution of bilateral dealing platforms offered by banks and also independent trading firms. By leveraging these platforms, he said, treasurers can seek competitive quotes from multiple counterparties and transact online. These solutions offer significant opportunities in managing risks and costs by enabling treasurers to seek the best quotes.

Large firms such as Oanda, for example, offer competitive rates and technology solutions with an API that plugs easily into major enterprise resource planning (ERP) and corporate finance systems. Newer start-ups such as Currenxie in Hong Kong provide businesses with tailored FX solutions, including spot and forward FX services at rates that it says are guaranteed to beat bank rates.

For ecommerce and cross-border remittances, the ability to pay and receive foreign currencies seamlessly is becoming a strategic enabler and can be a powerful competitive advantage. While global and regional banks continue to expand their services for multi-currency offers on ecommerce sites and for cross-border remittances, new competitors such as Stripe, Ripple or Payoneer offer alternative solutions.

Traders, at least, are apparently starting to take notice. On a global basis, market intelligence provider Greenwich Associates found that 20% of institutional traders now execute their FX orders using non-bank liquidity, up from 16% in 2015.

Perhaps surprising, Lloyd-Williams said some of the newer platforms could actually be beneficial for banks. “More (bank) resources can be invested in expertise and solutions to support clients’ wider FX requirements,” he said, “as opposed to quoting on regular transactions.”

Managing FX well

Given the high levels of FX volatility and potentially high margins for trading, corporates – and in particular, medium-sized or smaller firms that are expanding their international business – would do well to focus more on FX and take advantage of the new solutions so that they can improve profitability faster as they grow globally.

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