Mack on FX & Treasury: It's a Multi-Currency World Out There

"New financial technologies make it cheaper to trade these currencies" — Barry Eichengreen

[1] It's a Multi-Currency World Out There! Stop what you are doing and read this article by Serkan Arslanalp, Barry Eichengreen, and Chima Simpson-Bell (*). The authors argue against the idea of world dominated by just a handful of currencies, especially USD and, to a lesser extent, EUR. Here's what I found especially interesting about this piece: it's not about global macro-issues like monetary policy or even geopolitics — rather, it's about the role of technology and the 'micro-economic' activity of corporate treasurers. The advent of Multi-Dealer Trading platforms like 360T is reducing spreads, thereby eroding USD's network effects. CFOs and corporate treasurers, seeking to take advantage of the benefits of 'embracing currencies', are using more currencies in their business operations. That's why the currencies of smaller, but well-managed economies, are gaining ground — alongside the natural rise of CNY. They include, among others, CAD, AUD, NZD, SKR, NOK, SGD and KRW. It's a multi-currency world out there!

[2] Gartner CFO Survey. The latest edition of the Gartner CFO Survey emphasises the strategic role of digital technology: “CFOs see digital technology  as a smart long-term bet, but it’s also a critical part of their plan to tackle the effects of rising inflation on corporate margins,” said Marko Horvat at Gartner. “Nearly a quarter of CFOs think greater automation will help to combat inflation , and this aligns with CEOs who are even more bullish on tech with 85% planning to increase spend over last year.” This comment caught my attention: “Gartner experts noted that efficient growth companies — those which use spending to differentiate themselves from competitors during times of economic difficulty, rather than relying on cuts — tend to achieve better sustained growth and margin improvements in the long term.” Currency Management Automation, anyone?

[3] FX markets: what a week! It was a week to remember in FX. Stealing the headlines, GBP lost more than 3.5% of its value against USD on Friday, on the back of tax cuts announced by Britain's new Chancellor of the Exchequer Kwasi Kwarteng. According to Jens Nordwig (@jnordwig ), the weekly move was "truly historical". Meanwhile, Adam Posen (@adamposen ) at the Peterson Institute argues that short-term interest increases are only a matter of time. In fact, you only need to look at 10-year Gilts (+33 bps on Friday) to arrive at that conclusion. TRY had a tough week as well after yet another surprising 100 bps rate cut. This is the kind of predictable upredictability —a term coined by The Economist— that makes you want, as a corporate treasurer, the tools to simultaneously handle FX volatility, shifting interest rate differentials, and less-than-stellar cash flow visibility.

[4] Some Kantox links. Five touchpoints between liquidity and FX management [VIDEO ]; Digitisation and FX hedging (Yannick Schwendener at EuroFinance in Vienna); "Set the budget rate like a champion "; IATA World Finance Simposium in Doha (Marc Padrosa and Antonio Rami ).

See you at @treasury_fx

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(*) Serkan Arslanalp, Barry Eichengreen, and Chima Simpson-Bell: "The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Non-Traditional Reserve Currencies ", IMF Working Paper 22/58, March 2022. Alternatively, go to the IMF blog for a short version (*).