Currency Pulse #29 — FX & the Cost of Capital

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Backed by tennis superstar Roger Federer, On Holdings has captured 40% of the running shoe market in Switzerland and 10% in Germany. It has achieved over CHF 2 billion in net sales for the last twelve-month period. Meanwhile, gross profit margins are just shy of 60%—and some analysts argue they could go a lot higher. 

A structurally strong currency can create headaches. According to Bloomberg, Swatch Group suffered a CHF 550 million drag on revenue in 2023 on account of the strong CHF. And that’s not all. When selling EM currencies forward against CHF, treasury teams must contend with the reality of a deep forward discount. 

On Holdings takes advantage of the strong Swiss franc and the resulting low cost of capital. It uses robotics in a way that may lead to a sharp reduction in its inventory-to-sales ratio, a problem that plagues some of its competitors—especially at a time of relatively high USD and EUR interest rates.

Stay tuned for more.

Job Board: Sales positions

Kantox keeps looking for top candidates to join the team. Michael Schimmel, Chief Commercial Officer, needs talented professionals to strengthen the Commercial Team as the company expands into new markets. There are more than 30 positions to be filled! 

Here are some of the sales positions waiting for the right candidate (*): 

• Account Executive, DACH Market
• Account Executive, Poland Market
• Account Executive, Portugal Market
• Business Development Representative, DACH
• Business Development Representative, France

(*) All positions are posted on the Kantox Careers page.

adidas and counterparty risk

The treasury team at the German sportswear giant uses Credit Default Swaps (CDS) to assess counterparty risk (*). At the start of 2024, the company had a notional amount of €8.3bn in FX derivatives, of which 95% in currency forwards.

adidas subsidiaries are authorised to work with banks rated BBB+ or higher, that is, investment grade credits. Only in exceptional cases are subsidiaries authorised to work with banks rated lower than BBB+, presumably in EM.

“The Treasury department arranges currency, commodity, interest rate, and equity hedges, and invests cash with major banks of a high credit standing worldwide. To limit risk [...] the credit default swap premiums of the company’s partner banks are monitored on a monthly basis” — adidas

In other words, at adidas, treasurers use the CDS markets as a tool for price discovery, not as trading or investing vehicles.

(Note that API-based connectivity to Multi-Dealer Trading platforms, an integral part of Currency Management Automation, allows treasurers to manage several aspects of counterparty risk).

(*) Credit Default Swaps are bilateral contracts between a protection buyer and a protection seller in view of possible 'credit events' (i.e., default). The cost of such protection, known as the 'spread', provides market-based information about issuer creditworthiness.

Netflix and the dollar—again

The streaming giant forecasts ARM (Average Revenue per Membership) to be “roughly flat year over year” due to ongoing FX headwinds.

“Our updated revenue forecast reflects solid membership growth trends and business momentum, partially offset by the strengthening of the US dollar vs. most other currencies. We've launched a FX risk management program to reduce near-term volatility [but] we don’t intend to be fully hedged” — Netflix 

Netflix has been battling the impact of the strong USD for a while now, as non-US dollar revenue —collected in more than 40 currencies— is currently about 60% of total companywide revenue and is likely to increase over time.

See our analysis on the CurrencyCast podcast.

Understanding payments: Lorraine Mouat

On Kantox's podcast, Agustin Mackinlay talks to Lorraine Mouat, Head of Payments at Thistle Initiatives in the UK. The discussion concentrates on innovation in the payments space and the Financial Conduct Authority’s regulatory framework.

“We're supporting clients through the authorisations process, but also in providing regulatory compliance audits and general ad hoc advice and guidance. So keep your clients up to date with everything that might be relevant to their sector” — Lorraine Mouat 

Here are some of Mrs Mouat’s main points:

1. The impact of innovation. Recent innovations in financial technology have enabled more efficient, secure and convenient payment solutions that can cater for more diverse needs of consumers but also for businesses.
2. Consumer behaviour. We've witnessed an important change in consumer behaviour in recent years. It's fair to say that consumers demand a little bit more convenience, more speed and more flexibility in terms of how they are going to make and receive payments.
3. Instant payments. Instant payments overall are gaining traction globally, but the UK is most definitely a global leader, certainly in the fintech and payments landscape. We're particularly known in the UK for our advanced instant payments infrastructure. 
4. Consumer Duty regulation. This initiative represents a significant step forward in enhancing consumer protection. But it is also about fostering trust in the financial services sector itself. Firms need to demonstrate greater accountability for their actions. 

Watch the full episode 👉 here.

Five Useful Links

1. Instant and cross-border payments. Federal Reserve Bank board member Christopher Waller adopts a cautious approach to instant payments at a cross-border level. Interoperability between or among domestic fast payment systems is made difficult, not so much by technology, but by legal, compliance, settlement, and governance challenges. 

2. Marketplaces. The Financial Times’ Richard Milne writes about the emergence of peer-to-peer marketplaces. The global second-clothing market is forecasted at $350bn by 2028. It is, however, “notoriously difficult for such platforms to make money”. A great opportunity to use Currency Management Automation solutions.  

3. The BIS on the carry trade. The Bank of International Settlements reviews the bout of FX and equity markets volatility in early August 2024. Net short positions in JPY futures by “speculative traders” reached historical peaks of around ¥2 trillion (or about $14bn). By extrapolation, the BIS arrives at a comparative figure of $160bn in FX OTC derivatives.

4. Exchange rate passthrough. Yet another paper on the impact of the ‘FX cliff’ on companies’ pricing. Pass-through metrics tend to be lower in countries that combine credible inflation targets and central bank independence. Country characteristics and the nature of the FX volatility episode also matter. 

5. FX and valuation. In the Journal of International Finance and Economics, Carl McGowan, V. Reddy Dondeti and Demir Yener write about “The Impact of Forex Changes on the Valuation of Multinational Subsidiaries”. The authors simulate the impact of a change in the FX rate on USD company cash flows.

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