Antonio Rami, Co-Founder of Kantox
Political uncertainty and market volatility have become the new normal for businesses in recent months. Since the vote for Brexit, the unfolding negotiations have seen the currency markets enter a roller-coaster ride – none more so than sterling. We even saw the pound drop to a 30 year low as it reacted to Theresa May’s announcement that the UK would begin formal Brexit negotiations by the end of March 2017.
After a period of seemingly little change to the business landscape, we’re now beginning to see businesses feel the real effects of this volatility. Tescowas forced to temporarily remove Unilever products from their stores in reaction to the supplier hiking prices to compensate for the sharp drop in the pound’s value a few week ago. Shares in EasyJet also crashed following reports that the slump in the pound has cost it approximately £90 million, and more recently, computer manufacturer Apple hiked the prices of its new laptops by up to a 20%.
With currency volatility reaching severe levels, businesses must ensure that rational risk management strategies are in place so that they are not caught out. The first step towards an effective risk management plan is integration: This cannot be a concern exclusively for the treasury department, as has traditionally been the case; these plans now need to be adopted by the whole organisation.
If businesses were to implement old-fashioned strategies, whereby an exchange rate was defined and an approximate volume of sales was calculated, they may survive through periods of relative stability. However, these outdated techniques won’t cut it in today’s economic climate, which is far from stable. If the market moves at an unanticipated rate, which it has done so for many months now, these strategies won’t allow the business to act quickly enough to ensure that profits aren’t affected.
This is why efficient FX strategies need to take into account the specific currency needs of the company and for that matter it is crucial that the finance and business teams work together in order to define an FX policy based on target exchange rates and risk tolerance levels, established through empirical reasoning and according to real numbers that exclude optimism.
Furthermore, the management at macro level has to be combined with micro-management actions down the line. These actions should observe the different currency risk cycles in each business line and apply the alternative hedging approaches when needed. To keep the company’s profit margins steady, the FX strategy needs to be able to flex to all situations.
A clear policy, with the right tools to monitor FX exposure in real time, paired with a certain level of automation, will be the recipe for success for minimising the impact of unexpected currency swings.
Some sectors are understandably more prone to the effects of currency volatility, take for example the travel sector. Businesses in this sector should look to implement a dynamic hedging strategy that takes into account a number of different strategies in parallel that can be automated to manage currency risk and protect profitability.
An effective dynamic hedging strategy will need to have identified the businesses FX exposure from inception. It will then need to define business rules to manage exposure, according to the FX policy. This kind of strategy will also need a tool to monitor FX in real-time (monitoring FX markets manually would be a full time job in itself!), and lastly, it needs the ability to automate trade execution which will enable the business to address volatility in real-time, without wasting time on manual processes.
By deploying a dynamic hedging strategy that encompasses all of these elements, one of our larger clients in the travel sector managed to reduce the impact of FX volatility on its profitability to less than 1% in 2015, resulting in a net saving of over 500,000 USD simply on exchange rate margin in the past year.
Centralising currency risk management
Businesses that deal with extensive volumes of payments in multiple currencies, simply cannot waste time managing each currency individually. This would not only be a drain on the finance team’s time and resource, but by taking each currency separately as opposed to looking at the whole payment flow, payments to suppliers and sales in different currencies could be dramatically affected. Creating a central point whereby the business manages payments as a whole, is a sure-fire way to enhance efficiency. With the one-platform approach, businesses will ultimately minimise the risk of losing money down to poor exchange rate management whilst also increasing liquidity by boosting cash flow.
We are continually seeing how the volatility of the pound in particular is affecting the day-to-day management of enterprises, but these businesses should not focus on monitoring the pound alone. It is experiencing a moment in the spotlight, but other currencies could just as equally be affected by unexpected global events in the coming months. Maintaining a global view of the businesses risk exposure and relying on automation to deploy strategies in real-time is the key to success for companies in these uncertain times.
Barclays announces new trade finance platform for corporate clients
Barclays Corporate Banking has today announced that it is working with CGI to implement the CGI Trade360 platform. This new platform will provide an industry leading end-to-end global trade finance solution for Barclays clients in the UK and around the world.
With the CGI Trade360 platform, Barclays will provide clients with greater connectivity and visibility into their supply chains, allowing them to optimise working capital efficiency, funding and risk mitigation. By utilising cloud based functionality for corporate banking clients, Barclays will also be able to offer a leading client user experience through easy access and real-time integration to essential information, combined with the latest trade solutions as the industry-wide shift to digitisation continues to accelerate.
This move underpins Barclays commitment to supporting the trade and working capital needs of their clients and reinforces a commitment to innovation that has been central to the bank for more than 300 years.
James Binns, Global Head of Trade & Working Capital at Barclays, said: “We are delighted to announce our move to the CGI Trade360 platform and to have started the implementation process. We have a longstanding partnership with CGI, and the CGI Trade360 platform will mean we can continue delivering the best possible trade solutions and service to our clients for many years to come.”
Neil Sadler, Senior Vice President, UK Financial Services, at CGI, said: “Having worked closely with Barclays for the last 30 years, we knew we were in an excellent position to enhance their systems. Not only do we have a history with them and understand how they work, but part of the CGI Trade360 solution includes a proof of concept phase, which is essentially seven weeks of meetings and workshops with employees across the globe to guarantee the product’s efficiency and answer all queries. We’re delighted that Barclays chose to continue working with us and look forward to supporting them over the coming years.”
What’s the current deal with commodities trading?
By Sylvain Thieullent, CEO of Horizon Software
The London Metal Exchange (LME) trading ring has been the noisy home of metals traders buying and selling for over a hundred years. It’s the world’s oldest and largest metals market and is home to the last open outcry trading floor. Recently however, the age-old trading ring, though has been closed during the pandemic and, just a few weeks ago, the LME announced that it will remain so for another six months and that it is taking steps to improve its electronic trading. This news fits in with a growing narrative in commodities about a shift to electronic trading that has been bubbling away under the surface.
Something certainly is stirring in commodities. The crisis has affected different raw materials differently: a weakening dollar and rising inflation risks bode well for some commodities with precious metals being very attractive, as seen by gold reaching all-time highs. Oil on the other hand has had a tough year and experienced record lows from the Saudi-Russia pricing war. It has been a turbulent year, and now prices look set to soar. While a recent analyst report from Goldman Sachs predicts a bullish market in commodities for the year ahead, with the firm forecasting that it’s commodities index will surge 28%, led by energy (43%) and precious metals (18%).
Increasingly, therefore, it seems that 2020 is turning out to be a watershed moment for commodities, and it’s likely that the years ahead will bring about significant transformation. And whilst this evolution might have been forced in part by coronavirus, these changes have been building up for some time. Commodities are one of the last assets to embrace electronic trading; FX was the first to take the plunge in the 90s, and since then equities and bonds have integrated technology into their infrastructure, which has steadily become more advanced.
The slow uptake in commodities can be explained by several truths: the volumes are smaller and there is less liquidity, and the instruments are generally less exotic, essentially meaning it has not been essential for them to develop such technology – at least not until now. This means that, for the most part, the technology in commodities trading is a bit outdated. But that is changing. Commodities trading is on the cusp of taking steps towards the levels of sophistication in trading as we see in other asset classes, with automated and algo trading becoming ever prominent.
Yet, as commodities trading institutions are upgrading their systems, they will be beginning to discover the extent of the job at hand. It’s no easy task to upgrade how an entire trading community operates so there’s lots to be done across these massive organisations. It requires a massive technology overhaul, and exchanges and trading firms alike must be cautious in the way they proceed, carefully establishing a holistic, step-by-step implementation strategy, preferably with an agile, V-model approach.
The workflow needs to be upgraded at every stage to ensure a smooth end-to-end trading experience. So, in replacement of the infamous ring, these players will be looking to transform key elements of their trading infrastructure, including re-engineering of matching engines and improving communications with clearing houses.
However, these changes extend beyond technology. For commodities players to make a success of the transformation in their community, exchanges need to have highly skilled technology and change the very culture of trading. All of which is currently being done against a backdrop of lockdown, which makes things much more difficult and can slow down implementation.
What is clear is that coronavirus has definitely acted as a catalyst for a reformation in commodities. It is a foreshadowing of what lies ahead for commodities trading infrastructure because, a few years down the line, commodities trading could well be very different to how it is now, and the trading ring consigned to history.
Afreximbank’s African Commodity Index declines moderately in Q3-2020
African Export-Import Bank (Afreximbank) has released the Afreximbank African Commodity Index (AACI) for Q3-2020. The AACI is a trade-weighted index designed to track the price performance of 13 different commodities of interest to Africa and the Bank on a quarterly basis. In its Q3-2020 reading, the composite index fell marginally by 1% quarter-on-quarter (q/q), mainly on account of a pull-back in the energy sub-index. In comparison, the agricultural commodities sub-index rose to become the top performer in the quarter, outstripping gains in base and precious metals.
The recurrence of adverse commodity terms of trade shocks has been the bane of African economies, and in tracking the movements in commodity prices the AACI highlights areas requiring pre-emptive measures by the Bank, its key stakeholders and policymakers in its member countries, as well as global institutions interested in the African market, to effectively mitigate risks associated with commodity price volatility.
An overview of the AACI for Q3-2020 indicates that on a quarterly basis
- The energy sub-index fell by 8% due largely to a sharp drop in oil prices as Chinese demand waned and Saudi Arabia cut its pricing;
- The agricultural commodities sub-index rose 13% due in part to suboptimal weather conditions in major producing countries. But within that index
- Sugar prices gained on expectations of firm import demand from China and fears that Thailand’s crop could shrink in 2021 following a drought;
- Cocoa futures enjoyed a pre-election premium in Ghana and Côte d’Ivoire, despite the looming risk of bumper harvests in the 2020/21 season and the decline in the price of cocoa butter;
- Cotton rose to its highest level since February 2020 due to the threat of storm Sally on the US cotton harvest, coupled with poor field conditions in the US;
- Coffee rose 10% as La Nina weather conditions in Vietnam, the world’s largest producer of Robusta coffee, raised the possibility of a shortage in exports.
- Base metals sub-index rose 9% due to several factors including ongoing supply concerns for copper in Chile and Peru and strong demand in China, especially as the State Grid boosted spending to improve the power network;
- Precious metals sub-index, the best performer year-to-date, rose 7% in the quarter as the demand for haven bullion continued in the face of persistent economic challenges triggered by COVID-19 and heightening geopolitical tensions. In addition, Gold enjoyed record inflows into gold-backed exchange traded funds (ETFs) which offset major weaknesses in jewellery demand.
Regarding the outlook for commodity prices, the AACI highlights the generally conservative market sentiment with consensus forecasts predicting prices to stay within a tight range in the near term with the exception of Crude oil, Coffee, Crude Palm Oil, Cobalt and Sugar.
Dr Hippolyte Fofack, Chief Economist at Afreximbank, said:
“Commodity prices in Q3-2020 have largely been impacted by COVID-19. The pandemic has exposed global demand shifts that have seen the oil industry incur backlogs and agricultural commodity prices dwindle in the first half of the year. The outlook for 2021 is positive however conservative the markets still are. We hope to see an increase in global demand within Q1 and Q2 – 2021 buoyed by the relaxation of most COVID-19 disruptions and restrictions.’’
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