Navigating Currency Risks: Empowering Corporate Treasurers in Uncertain Times

In today's volatile global landscape, corporate clients face a daunting challenge in managing their foreign exchange (FX) exposure. Fluctuating currencies and geopolitical tensions have become the new norm, necessitating a robust and adaptable currency hedging strategy. Daisy-May Andrew, Interest Rates and FX Corporate Rates Sales at BNP Paribas, shares her insights on the issues faced by corporate treasurers and the importance of an effective hedging program in the current environment.

Unlocking the Power of Flexible Hedging Policies

Adapting to Changing Market Conditions

While corporate finance leaders typically aim to minimize the impact of FX market fluctuations, their hedging policies often lack the necessary flexibility. Daisy-May Andrew explains how this rigidity can lead to outdated policies that no longer serve their purpose. To stay effective, hedging policies must be regularly reviewed and updated to reflect the evolving market landscape.Automation can play a crucial role in enhancing the agility of corporate hedging strategies. Kantox's Dynamic Hedging Programme, for instance, provides an efficient way to automate the FX hedging process. This can help mitigate FX risk while also lowering the overall cost of managing currencies. By automating the entire FX workflow, corporate treasurers can free up their time to focus on more value-add tasks, such as improving liquidity management and optimizing profits.

Overcoming the Forecasting Challenge

Accurate forecasting remains a notable challenge for many corporates, and this can lead to hesitation in automating their hedging programs. Daisy-May Andrew, however, suggests that automation can actually help alleviate this issue."With the right automation tools in place, clients can add systematic hedging checks, which should in theory be able to search for the same red flags that one would do manually, albeit without the added concern of human error. This in turn frees up time to work on improving the forecasting model itself."By removing the heavy lifting from the FX hedging process, CFOs and treasurers can devote more time and resources to enhancing their forecasting capabilities and focusing on other strategic priorities.

Navigating the Carry Trade Conundrum

The carry trade has also been a point of focus for corporates and investors alike. This strategy involves borrowing a low-yielding currency, such as the Japanese Yen (JPY), to invest in higher-yielding currencies. However, when the high-yielding currency weakens or the low-yielding currency strengthens, the carry benefit erodes, leading to a snowball effect as investors unwind their trades.Corporates don't aim to make money from carry trades but instead look to take advantage of favorable forward points to hedge to longer dates or top up existing hedges. With increased rate divergence, however, corporates face challenges when hedging high-carry currencies. To mitigate this, they can consider incorporating optionality into their hedging portfolios, such as automated rolling collars, which have proven effective in low-volatility environments. Another approach is to hold off hedging and use limit/stop orders to ensure the market doesn't move too far.

Embracing a Holistic Approach

Corporate clients are in greater need of effective FX hedging strategies to manage the multifaceted risks they face. Flexible hedging policies, automation, and accurate forecasting are just some of the key considerations. By adopting a comprehensive and adaptable approach, corporate treasurers can navigate the uncertain waters of global markets and safeguard their organizations' financial well-being.To learn more about Kantox's FX hedging solutions and how they can empower your corporate treasury, reach out to your BNP Paribas sales representative and watch the full Currency Cast episode featuring Daisy-May Andrew.