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THE IMPORTANCE OF A STABLE BUSINESS STRATEGY IN VOLATILE TIMES
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%.
Strong strategies
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 However, these outdated techniques won’t cut it in today’s economic climate, which is far from stable.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.
Dynamic hedging
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.
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UK retail sales drop, NatWest loss dampen FTSE 100 mood
By Shivani Kumaresan and Amal S
(Reuters) – The FTSE 100 was muted on Friday as a bigger-than-expected drop in January retail sales underscored the business damage from a prolonged nationwide lockdown, while NatWest group fell after swinging to an annual loss.
The commodity-heavy FTSE 100 was flat as gains in miners Anglo American, Rio Tinto and BHP Group capped losses.
Oil producers BP and Royal Dutch Shell fell 1.2% and 0.5%, respectively as crude prices slid.
Data on Friday showed British retail sales tumbled much more than expected in January as non-essential shops went back into coronavirus lockdowns. Flash readings of business activity data, due at 0930 GMT, are likely to show the services sector struggling to return to growth in February.
“The 8.2% fall was considerably higher than we’d expected (around 4%), and provides clear evidence the hit to consumer spending is noticeably larger than it was during the November restrictions,” said James Smith, market economist at ING.
He added focus will now be on UK’s COVID-19 vaccination program and easing of restrictions, to drive economic recovery.
The FTSE 100 has recovered nearly 35% from its March 2020 lows but has been largely range-bound since the beginning of this year as a nationwide lockdown hurt business activity, undermining hopes of economic growth in the second half of the year.
The domestically-focused mid-cap FTSE 250 index rose 0.2%, with consumer and industrials stocks leading gains.
NatWest fell 0.6% after the financial services provider swung to a full-year loss for 2020 after COVID-19 lockdowns crunched household spending.
Segro Plc rose 1.7% after the real estate investment trust reported a near 11% jump in annual profit for 2020.
Banking group TBC Bank fell 2.3% after a slump in annual underlying profit due to lower interest rates and limited lending growth in the fourth quarter from the COVID-19 pandemic.
(Reporting by Shivani Kumaresan and Amal S in Bengaluru; Editing by Vinay Dwivedi and Krishna Chandra Eluri)
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Dollar slips further after disappointing jobs data, sterling shines
By Tommy Wilkes
LONDON (Reuters) – The U.S. dollar slipped further on Friday and the euro rebounded after disappointing U.S. data dented optimism for a speedy recovery from the COVID-19 pandemic, while sterling edged towards the $1.40 mark.
The U.S. currency had been rising as a jump in Treasury yields on the back of the so-called reflation trade encouraged investors back into the greenback.
But an unexpected increase in U.S. weekly jobless claims soured the economic outlook and sent the dollar lower overnight.
On Friday it traded down 0.1% against a basket of currencies, the dollar index now at 90.474.
The string of soft labour data is weighing on the dollar even as other indicators have shown resilience, and as President Joe Biden’s pandemic relief efforts take shape, including a proposed $1.9 trillion spending package.
The euro rose 0.2% to $1.2113. The single currency showed little reaction to German and French flash purchasing manager index data, which unsurprisingly showed a slowdown in activity in January.
Despite the recent rise in U.S. yields, many analysts think they won’t climb too much higher, limiting the benefit for the dollar.
ING analysts said that “the rise in rates will be self-regulating, meaning the dollar need not correct too much higher.”
They see the greenback index trading down to the 90.10 to 91.05 range
Sterling has been the standout performer in 2021 and on Friday rose to $1.3987, an almost three-year high amid Britain’s aggressive vaccination programme.
Given the size of Britain’s vital services sector, analysts say the faster it can reopen the economy the better for the currency.
The dollar bought 105.46 yen, down 0.2% and a continued retreat from the five-month high of 106.225 reached Wednesday.
Many analysts expect the dollar to weaken over the course of the year as it has traditionally done during times of global economic recovery, though it might take some time to develop.
“It looks to me like there’s some exhaustion in that just-straight global reflation theme,” leading the dollar to trend largely sideways for now, said Daniel Been, head of FX at ANZ in Sydney.
(Additional reporting by Kevin Buckland in Tokyo; Editing by Hugh Lawson)
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Bitcoin is ‘economic side show’ and poor hedge against stocks – JP Morgan
By Stanley White
TOKYO (Reuters) – Bitcoin is an “economic side show” and a poor hedge against a decline in equity prices, analysts at JP Morgan said in a sobering assessment that could undercut the cryptocurrency’s rise to record highs.
Current prices are well above JP Morgan’s estimates of fair value and the mainstream adoption of bitcoin increases its correlation with cyclical assets, which reduces the benefits of diversifying into bitcoin, the investment bank said in a memo.
Bitcoin, the most popular cryptocurrency, last traded at $51,116 on Friday, down from a record high of $52,640 reached on Wednesday. Rival cryptocurrency ether traded near a record of $1,951 reached earlier on Friday.
Bitcoin has surged by 45% so far this month, fuelled by signs it is winning acceptance among mainstream investors and companies, such as Tesla, Mastercard and BNY Mellon, but many observers remain sceptical of the unregulated and highly volatile digital asset.
“Crypto assets continue to rank as the poorest hedge for major drawdowns in equities, with questionable diversification benefits at prices so far above production costs, while correlations with cyclical assets are rising as crypto ownership is mainstreamed,” analysts at JP Morgan said.
Some of bitcoin’s supporters argue that the cryptocurrency is “digital” gold that can hedge against inflation and declines in the dollar.
Based on that logic, bitcoin would need to rise to $146,000 in the long-term for its market capitalisation to equal total private-sector investment in gold via exchange-traded funds or bars and coins, according to JP Morgan.
Tesla’s chief executive Elon Musk said on Thursday that owning bitcoin was only a little better than holding cash. He also defended Tesla’s recent purchase of $1.5 billion of bitcoin, which re-ignited mainstream interest in the digital currency.
(Reporting by Stanley White; Editing by Sam Holmes)
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