In today’s uncertain markets, corporate clients increasingly find themselves juggling the risks of unpredictable currency fluctuations and geopolitical tensions when managing their FX exposure. The continued trend of globalisation also necessitates the need for an effective currency hedging programme.
Daisy-May Andrew, Interest Rates and FX Corporate Rates Sales at BNP Paribas, joined Kantox’s Currency Cast series to shed light on the issues faced by corporate treasurers and discusses the importance of an effective hedging programme in today’s environment.
The importance of flexible hedging policies
While CFOs and treasurers generally aim to minimise the impact of FX market fluctuations, their hedging policies often lack flexibility. Andrew explains how this rigidity can lead to outdated policies that no longer serve their purpose.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 changing market conditions.
For example, Kantox’s Dynamic Hedging Programme provides an effective 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 while improving liquidity management and optimising profits.
The challenge of forecast accuracy
While the benefits of automation are clear, a notable challenge faced by corporates is accurate forecasting, Andrew explains. This means some corporate clients may be reluctant to automate their hedging programs, to allow them some manual oversight.
However, while many corporates struggle with forecasting, automating the FX hedging process can help alleviate this issue of forecasting, suggests Andrew.
“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.”
Ultimately, by removing the heavy lifting from the FX hedging process, CFOs and treasurers have more time to work on their forecasting capabilities and other value-added tasks.
Beyond the carry trade
The carry trade has also been a point of focus for corporates and investors recently. The carry trade involves investors borrowing a low yielding currency, such as the Japanese Yen (JPY), to invest in higher-yielding currencies. However, when that currency strengthens or the high-yielding currency weakens, the carry benefit erodes, causing investors to unwind their trades, leading to a snowball effect. This is what happened over the summer 2024, with the USDJPY pair falling nearly 12.5% in a month.
Corporates don’t aim to make money from carry trades but instead look to take advantage of favourable forward points to hedge to longer dates or top up existing hedges. However, with increased rate divergence, 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.
Corporate clients are in greater need of effective FX hedging strategies to manage risks. Flexible hedging policies, automation, and accurate forecasting are just some of the considerations. Watch the full Currency Cast episode here and reach out to your BNP Paribas sales representative to find out more about Kantox’s FX hedging solutions.