Currency Pulse #30 — Pricing

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Central banks are busy studying firms’ responses to FX moves. When it comes to FX hedging programs, there are several setups. Companies that ‘reprice’ in the face of adverse moves in currency markets should consider a static hedging program —in combination with a micro-hedging program for firm orders— to protect the budget rate, one period at a time.

Instead, businesses that opt to keep steady prices across multiple periods would do well to opt for a layered hedging program that ‘smoothes out’ the hedge rate over time. Here are three recent studies, published by major central banks, devoted to pricing and FX markets: 

• Sweden. Few price changes take place in the event of moves in the USD-SEK rate. This is because sustained USD appreciation reflects 'flight-to-safety' episodes that signal less economic dynamism ahead. Thus, many firms choose to not pass on the increased costs [see].
• Switzerland. Firms in a tight financial position seek to maintain profit margins, even at the expense of future market share. Time is the key element. The large pass-through elasticity rate of 41% only materialises about a year after a significant FX shock [see].
• United Kingdom. Following the GBP-USD 'cliff' after Brexit and the 2022 ‘flash crash’, UK firms have party dollarised their exports. USD invoicing surged from 1/3 to nearly 55%, while the share of non-EU exports invoiced in GBP declined from 55% in 2015 to 35% in 2022 [see].

Layered hedging, Part I: Should you apply?

Our new series of blog posts deals with FX layered hedging programs, surely one of the most exciting areas of currency management. This introductory post deals with:

• The differences in pricing parameters between companies that need layered hedging and those that apply static FX hedging programs. 

• The notion of the ‘cliff’, both in terms of fluctuations in exchange rates and the impact of currency moves on companies' profit margins. 

• The type of ‘rolling’ cash flow exposure that must be collected and managed in layered hedging programs.

Read the entire blog 👉 here.

Job Board: More 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, Travel Industry
• Account Executive, Portuguese Market
• Business Development Representative, Benelux
• Business Development Representative, France

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

Bi-weekly Backtest: Austrian diagnostics services company (*)

Our bi-weekly back-test concerns a Vienna-based exporter of image diagnostics equipment. The firm has sales in North America, both in USD and CAD. The company lacks a coherent FX hedging strategy and is exposed to episodes of EUR weakness on its $45m annual sales.

We backtested a combination that includes: (a) a static hedging program to protect the budget rate; and (b) a micro-hedging program for incoming firm sales orders. The combined hedging programs tackle several pain points, including:

• Profit margin protection. The goal is to systematically protect the FX budget rate that is set at the start of each campaign/budget period.
• Hedging precision. Since hedging firm sales orders is done on realised exposure, there is little possibility of over- or under-hedging.
• Forward points. Conditional orders allow managers to delay hedge execution, reducing the impact of unfavourable forward points

The back-tested solution results in an annual average gains of €1,732,000 mostly on account of budget rate outperformance. This is due to the hedging of firm orders, which is by definition executed at a better rate than the budget rate—otherwise stop-loss orders would have been triggered. 

An extra €33,800 in savings comes from the ‘best-price execution’ feature of connectivity to the Multi-Dealer Trading platform 360T. 

(*) Every two weeks, Currency Pulse presents a real-life case. No names are mentioned, absolute values and some details are changed. We use tools for backtesting, with historical data and Monte Carlo simulations, our proposed automated hedging programs.

adidas & On Holdings: mature vs. young growth

In the latest episode of CurrencyCast, Agustin Mackinlay describes the FX-related challenges —and opportunities— faced by two very successful European sportswear companies: adidas and On Holdings. The main topics include: 

• FX risk management. What are adidas’ principal sources of exposure to currency risk? How does a centralised FX risk management work? Is there scope for FX automation to help the German company boost its profit margins?
• The impact of minor currencies. Puma and adidas’ €100m shortfall question: why it can be costly to neglect minor currencies—and how Currency Management Automation comes to the rescue of treasurers. 
• Thriving in a strong currency context. A structurally strong currency is not necessarily an impediment to global expansion—provided that the finance team knows how to take advantage of the resulting low cost of capital.

Watch the entire episode here. 

Keep calm and automate

In early August 2024, net short positions in yen futures by “speculative traders” had reached historical peaks of around ¥2 trillion (or about $14 billion). As the Bank for International Settlements argues, futures are only "the tip of the iceberg" (*). Over-the-counter FX derivatives bear much larger positions.

“FX carry trades were hit hard by the deleveraging pressures. Various estimates based on both on- and off-balance sheet activity yield a rough middle ballpark of ¥40 trillion ($250 billion) going into the event” — BIS

To what extent should corporate FX managers pay attention? Are there lessons to be learned from a currency management perspective? At Kantox, our answer is mostly: "Keep calm and automate".

(*) Matteo Aquilina, Marco Lombardi, Andreas Schrimpf and Vladyslav Sushko: “The market turbulence and carry trade unwind of August 2024”, BIS Bulletin No. 90

Five Useful Links

1. The ‘fintechisation’ of Travel. According to ACI Worldwide, 90% of travel firms are taking fintech and payments as a priority. As Marc Padrosa points out, there is a lot more to the Travel fintechisation story than just payments: "Behind the scenes, with less glitz, Fintechs help B2B and B2B travel distribution companies automate a complex FX workflow.”
2. European treasury hubs. Treasury Today analyses the pros and cons of several European ‘treasury hubs’ that are using talent, taxes and target markets to attract the treasury teams of multinational companies. Under review: London, Luxembourg, Geneva and Switzerland, Paris and Dublin. 
3. A sceptical look at CBDCs. Just a few years ago, Central Bank Digital Currencies (CBDCs) were expected to take the world by storm. Now scepticism is growing. Senghoon Cho at the Bank of Korea argues that behavioural adjustments would make it difficult to explain the potential benefit of CBDCs to enhance competitiveness. 
4. Pricing-to-market of Brazilian exports. Most Brazilian exporters use USD as a vehicle currency to invoice exports. This practice, a byproduct of the country’s macroeconomic volatility, leads exporters to stabilise their dollar price for exports, which reduces heterogeneity between destination markets (full EconomiA paper).
5. Deloitte on CFOs. Last year, 24% of S&P CFOs became CEOs, a figure that stood at 8.8% in 2021. Their risk management skills and data proficiency are highly valued. Yet many struggle to articulate a path for growth. Automated FX management may have a role to play—it finds itself right at the intersection of strategy, technology, cost, risk and growth.

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