Currency Pulse #21 — Rising stars

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Rising stars: small-country currencies

Remember the ‘de-dollarisation’ debate? There’s new data. This story deserves to be told from a bottom-up, micro-economic point of view. More than top-down geopolitical factors, what really matters is the technology that treasurers have nowadays at their disposal. 

Thanks to Multi-Dealer Platforms such as 360T , they can execute trades —in favourable liquidity conditions— in the currencies of a number of small, but well-managed economies: SEK, NOK, CAD, AUD, NZD, SGD and KRW. This allows finance teams to expand the range of currencies used in day-to-day commercial operations.

Updating with 2023 numbers the study that signalled this trend, noted FX expert and co-author Barry Eichengreen comments on X: 

"Note how the RMB share is no longer rising. The main beneficiaries of the declining share of USD and the Big Four —USD, EUR, GBP and JPY— are CAD and AUD, and other small-country currencies" — Barry Eichengreen. 

To fans of the multi-currency world like ourselves, this is great news. Embracing currencies, anyone?

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FX Knowledge Hub. Constraints

When discussing automated FX hedging programs at Kantox, we make a distinction between primary objectives, secondary objectives and constraints. Each of these points suggest company-specific situations that need to be thoroughly understood—particularly in regards to the pricing parameters of the business.

• Primary objectives: They include: protecting a dynamic pricing rate or eliminating accounting FX gains and losses in micro-hedging; protecting an individual campaign/budget rate in static hedging; achieving a smooth hedge rate in layered hedging.

• Secondary objectives: The main secondary objective is the optimisation of forward points — maximising them when they are favourable, reducing their impact when they are unfavourable. Other secondary objectives involve flexibility and risk tolerance considerations.

• Constraints: Currency managers may face certain constraints when designing their FX hedging program. These include the degree of forecast accuracy, the impact of markups in terms of the competitive position, and the maximum trade length authorised by banks. 

This last point is confirmed in a recent paper. The authors find evidence that hedging maturity is constrained by the availability of internal resources in terms of collateral. But note the interplay between objectives and constraints. The use of conditional FX orders —when facing unfavourable forward points— can help reduce the need for collateral.

This is because conditional orders allow hedge execution to be delayed, and because they may help uncover additional netting opportunities, while keeping the exposure under active management throughout [see our report on cash and FX risk management].

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Bi-Weekly Back Test: EUR-based ‘Class C’ B2B marketplace (*) 

A Rotterdam-based B2B marketplace specialising in Class C purchases —non-recurrent transactions for goods that are considered as non-strategic, like furniture and office supplies— needs to handle the FX impact of more than 200,000 low-volume transactions.

With 135,000+ suppliers scattered around the world, the company is at a loss as to how to handle FX risk while taking advantage of the EUR’s forward premium. We proposed and backtested a micro-hedging program for firm orders designed to: 

1. Protect the dynamic FX rate: This can be done transaction by transaction. The exposure is in the shape of small-size entries that are aggregated into positions, and then hedged with perfect traceability throughout the workflow.
2. Profit from forward points: As most purchases are made in USD, PLN, CZK and IDR —that is, in currencies that trade at a forward discount to EUR— the company can capture more margin as it hedges its FX exposure.

With an average 60-day time lapse between firm orders and settlement, the financial gains are significant given the average 1.75%-2.00% annual forward discount of the currencies involved, and the firm’s 5%-7% profit margin range, which the proposed program fully protects.

The story of the Rotterdam-based B2B marketplace is yet another example of how Currency Management Automation allows medium-sized firms to scale their operations. The amount of entries is so large (several thousand per day), that manual execution must be ruled out.

Instead, the received SFTP exposure files can be split per currency pair, which makes it possible to process more data, while better isolating data sets that contain errors.

(*) Every two weeks, Currency Pulse presents a real-life case. No names are mentioned, and absolute values are changed. We use simulation tools to backtest, with historical data, our proposed hedging programs.

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The Fintechisation of Travel

In a piece for Travolution.com , Kantox’s Marc Padrosa Cabello writes about the seemingly unstoppable ‘fintechisation’ of the Travel industry. Is it just glitz? Or is it for real? Here are Marc’s main points:

• A powerful trend. To better serve customers —and to generate new sources of revenue —businesses are forced to collaborate with one another, offering products and services that individual companies could not create as effectively on their own.

"Leading firms are rushing to implement financial technology or fintech solutions to reduce costs, enhance their competitive position, and ultimately enrich the travel experience with a variety of payment solutions" — Marc Padrosa.

• Payments: Booking.com , Mews , Hopper and the French retailer C-Discount are examples of Travel-Fintech collaboration with a focus on payments. Here, it’s mostly about achieving control of the transactional flow while embedding solutions like Buy-Now-Pay-Later.
• Behind the scenes: Behind the scenes and with less glitz, HBX Group and its 'Bed Bank' operator Hotelbeds are using Fintech solutions —in this case: Kantox— to save on FX costs while confidently 'embracing currencies' to spur growth. 
• Testing the waters: Finally, Marc draws on his CurrencyCast interview with Mario Gavira (Kiwi.com) and Mauricio Prieto to show how some participants are cautiously partnering with Fintech firms as they thoroughly try and test new payments solutions.

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Similar, yet so different: the Netflix & Swatch FX story

In the latest episode of CurrencyCast, Kantox’s Agustin Mackinlay describes the FX-related headwinds faced by two very successful companies with a global footprint: Netflix and Swatch. What do best practices indicate in terms of FX risk management?

At first sight, the FX challenges of the two companies look very similar—managing the impact of an appreciating functional currency in the context of expanding foreign sales (60% of total revenue for Netflix). Yet, contrasting pricing strategies call for different hedging programs, each with its own distinct primary objective.

Secondary objectives like the optimisation of forward points also suggest a somewhat divergent approach that takes account of the forward premium/discount of USD and CHF relative to other currencies.

Finally: to what extent would these hypothetical FX hedging programs require automation? Watch the entire episode here. 

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Book review. A path for a “reasonable optimism” 

Morgan Housel. Same as Ever. A Guide to What Never Changes. New York: Penguin, 2023, 226 pages.

We selected this book in the hope of uncovering, for the benefit of Currency Pulse readers, one or two gems related to risk management and global economic trends. Morgan Housel outlines the path for “reasonable optimism”, a middle course between progress —which is undeniable, yet not always visible— and “the zillion things that can go wrong”. 

While the bad news is “not shy nor subtle”, progress happens so slowly that it barely gets noticed: “The most important things come from compounding. But compounding takes a while, so it’s easy to ignore”. Yet, an excess of optimism carries danger, as the pages devoted to Hyman Minsky remind us. “The world breaks about once in every ten years, on average—always has, always will”, concludes Housel.

Same as Ever contains some interesting thoughts on the power of ‘story-telling’ and business narratives. Yet, the author’s dismissal of discounted cash flow (DCF) as powerless in the face of ‘story-telling’ seems to discount (pun intended) Aswath Damodaran’s attempt at reconciling story-telling and DCF in Narrative and Numbers (2017).

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Five Useful Links

(1) TaaB: A very good piece by TMI - Treasury Management International . Although buzzwords always merit caution, this one is pretty clever: Treasury-as-a-Business or TaaB. It’s about something that many in the treasury world —including Kantox— have been advocating all along: let treasury act as a springboard for growth and enhanced firm valuation.

(2) McKinsey on CFOs: McKinsey asks a group of seasoned CFO: How should one prepare for the role? Among the suggested tips: (a) be prepared to say ‘No’ to the CEO (to create trust); (b) be ready to take bold steps, like piloting an M&A transaction or overseeing a credit rating upgrade; (c) update your skills in both technology and sustainability. 

(3) B2B Multi Currency processing: Datos Insights Enrico Camerinelli publishes a report on B2B Multi Currency Processing Methods. The report recognises the diversity of the B2B currency processing market. It covers topics that are relevant to market participants, such as sell-side and buy-side firms, FX e-trading platforms and others.

(4) CFOs and CIOs: A WSJ CFO Journal article discusses the evolving relationship between CFOs and CIOs. CFOs are more aware of the fact that tech can drive growth, enhance productivity and improve customer experience. So the partnership between the CIO function and the CFO function "has never been more important". 

(5) The mighty USD: Penguin Random House announces the publication of Paper Soldiers. How the Weaponization of the Dollar Changed the World Order by Bloomberg journalist Salesha Mohsin. The book tells the story of how the U.S. dollar became a “powerful, contentious, and ultimately risky weapon of global influence”. 

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