By Ian Sams, European Head of Product at TraditionDATA.

Volatility has dominated the FX market in 2022. In the past few months alone, the US Dollar (USD) has surged to 20 year highs while the British Pound (GBP) and Japanese Yen (JPY) slumped to 50 year lows, and the Euro (EUR) dropped to a 20 year low.

The effects of such instability on corporates are clear. According to Kyriba’s October Currency Impact Report global companies sustained over $49 billion in total impacts to earnings from currency volatility, while North American companies reported a staggering 3,583% increase in foreign exchange (FX) headwinds compared to this time last year.

The surging dollar in particular is having a marked impact on companies that generate a significant chunk of their revenue overseas and consolidate it in the United States. Software firm Adobe recently said it expects FX effects to reduce its revenue growth rate by 4% during the 2023 fiscal year. Echoing this sentiment, Salesforce said FX rates are imposing an incremental $2 billion headwind on the firm’s long-term revenue target compared with last year.

The FX markets show little sign of stabilisation and this, coupled with existing geopolitical tensions, means FX risk management is now a strategic priority for CFOs and treasurers, as companies are now having to take a much more proactive approach to reviewing and hedging currency exposures. In order to do this, CFOs and treasury teams need access to specialist data.

The importance of real-time data

In such volatile market conditions, it is important to monitor the market in real-time to make necessary adjustments to hedging strategies. Data can be used to support business decisions such as increasing or decreasing ratios, shortening or lengthening contracts as required, and hedging against different currencies. Agile decision-making is vital, and real-time market data enables treasurers to make smart decisions based on actionable insight.

Source: TraditionDATA, Eikon

Back-testing hedging strategies

Finance teams also need to back-test their hedging strategies. This is the analytical process of applying trading or hedging strategies against historical market data (FX prices) to stress test and compare the performance and outcomes against a set of criteria.

Interpreted correctly, back-testing can optimise currency strategies, limit behavioural mistakes, automate many trading processes, and can provide confidence within a turbulent market.

Transaction cost analysis

In many instances, large multi-national corporates are publicly owned companies. With that comes a fiduciary responsibility to shareholders which means adhering to best execution practices. Transaction cost analysis (TCA) is an important data tool for treasurers to achieve this goal. TCA analyses data to evaluate whether trades are executed at fair prices. It enables corporates to understand how much they are being charged for the execution of their FX transactions. TCA goes hand-in-hand with best execution and serves as an ongoing audit of FX practices.

Picking the right data partner

Market data exists to provide users with an indication of where global markets are pricing and trading at any point. However, the increasing amount of fragmented data available in an OTC market such as FX, can make it a difficult space to navigate. Furthermore, complex derivatives and indices coupled with regulatory requirements have created more operational demands on market data management.

Many providers only sell huge data packages which require time and resources to unbundle and interpret before the data can be used to make business and trading decisions.

For a more efficient and cost-effective approach, finance teams should choose a partner who can provide data packages tailored to their individual requirements. Opting for a more granular approach ensures you only pay for the data you need, making it much simpler to draw out actionable insights.