COVID-19: Adjusting to Currency Volatility

The COVID-19 pandemic has brought numerous challenges for companies around the world – and for many organizations, the impact on currency volatility is among the most significant.

As leading currency market experts explained during a recent Kyriba webinar, large companies will be looking closely at their portfolio of exposures in this market. Given the current level of volatility, it’s clear that previous correlation assumptions cannot be relied upon. What’s more, countries that had previously focused on weakening their currencies in the context of trade wars may change course and strengthen their currencies as they emerge from this crisis.

As the current storm continues, no two companies will be affected in the same way. Some companies may find themselves over-hedged in the current market, resulting in a drain on their liquidity. Others may be under-hedged and lack the liquidity they need in certain currencies. Either way, liquidity – and the impact of currency volatility on liquidity – is likely to be a common theme.

To Forecast or Not to Forecast?

In this uncertain market, many companies are taking a fresh look at the role of forecasting. On the one hand, companies are keen to understand the impact market volatility will have on their cash flows going forward, and what the impact will be in the coming months. However, forecasting is challenging at the best of times – and attempting to forecast in this unprecedented situation is a labor-intensive exercise that may not produce accurate results.

Consequently, some companies are moving away from hedging based on forecasts, choosing instead to focus on hedging actuals and protecting the balance sheet. In addition, companies are taking steps to increase the frequency of monitoring their underlying exposures. It’s clear that companies that have good visibility over their exposures will be in a better position when it comes to weathering the storm.

Hedging Revisited

Understanding the company’s exposures and managing them effectively is far more critical in the current market than it was 12 months ago. For some companies, this will mean reviewing every step of the hedging process. For example, companies may ask local finance teams to pay additional attention when submitting their sales forecasts or may review the tenor of hedges.

Companies may also consider actions such as settling inter-company balances more frequently or reclassifying some of their inter-company payables as long-term debt in order to mitigate outstanding payables. Such actions can enable companies to take some of their exposures off the books without having to incur hedging costs.

Flexibility and Agility

As companies review whether changes are needed to their FX exposure management programs, it’s important to accept that the market has moved on. As such, budgeting and forecasting need to be rebased to take account of the information now available, rather than continuing to rely on historic information or on assumptions that currencies will revert to their previous norms.

Consequently, formulaic treasury policies that may have been appropriate a couple of months ago may no longer be fit for purpose. Companies need to re-evaluate their policies based on the current market conditions while still ensuring the business can continue operating. This requires considerable flexibility and agility as companies adjust to the new market environment.

In some cases, companies have already acted rapidly to recalibrate – for example, by switching from one type of trading to another. However, when it comes to taking action, it’s essential that the executive team has a high level of confidence in the treasury function. Treasuries which already had a strong dialogue with the CFO and with the investor relations team will have a head start when it comes to building that trust.

Embracing the Cloud

Last but not least, with companies abruptly transitioning to remote working models, the value of cloud-based solutions has been made clear. While few would have envisaged a crisis on this scale a few months ago, companies that had already embraced cloud-based solutions have found they have the flexibility needed to implement their business continuity plans rapidly and seamlessly.

In the coming months, there is likely to be an even greater focus on cloud-based systems. And with some FX providers struggling in this environment, companies will be playing close attention to which providers are fully supporting them through the current challenges, and which lack the infrastructure needed to provide business continuity.

To hear more insights on this topic from leading currency market experts, watch the recording of Kyriba’s recent webinar, Impacts of Covid-19 on Currency Volatility.