It has been tale of two very different quarters. During Q4 2020 the US dollar was affected by the efforts of the US Federal Reserve (central bank) to stimulate the US economy and keep interest rates low. As a result, the dollar weakened against most major currencies, including the euro.
It was very different in Q1 2021, as the successful roll-out of the US vaccination programme and the opening up of the economy helped to boost the dollar vs the euro, which was affected by the EU’s slow vaccination programme and start-stop approach to economic lockdown.
FX exposure is an inevitable by-product of their businesses for many corporates. As revealed by our quarterly Currency Impact Report, FX losses are a function of currency moves but also of the way in which those moves are managed. The experience of the Covid pandemic has encouraged senior management in many companies without an FX exposure management programme to develop that capability. And those that have programmes in place have been working to optimise them and reduce the impact of avoidable FX losses on their P&Ls.
Revealing and monitoring exposure
It was always going to be hard to forecast the potential impact of FX moves during a pandemic. But it was even harder if those FX positions were monitored manually and relied on multiple spreadsheets. FX exposure can be very complex and needs careful monitoring. For that reason FX risk management is often one of the last responsibilities that treasury teams take on, especially in SMEs
At Kyriba we often help companies to uncover FX exposures that they had not noticed before. For example, inter-company transactions within a group can cause particular problems but are often overlooked. Our technology aggregates all the information about individual group companies in a way that it can be effectively monitored. The group treasurer can then either net off different positions internally, or bring in a third-party to hedge the FX exposure. By using the Kyriba offer one of our clients (Ecolab) has been able to reduce its FX volatility by 40%.
Our FX risk management offer is comprehensive and is not dependent on the client already having our treasury management system installed. And given that it is a SaaS service, improvements can be built into the platform in response to client needs and then rolled out to all our customers without the need for a new installation.
Prospect of continued volatility increases need
Going into Q2 2021 the outlook for the FX market is one of continuing uncertainty and is very much linked to perceptions of the recovery from Covid. Asymmetric recoveries, for example contrasting the US with Brazil or India, will affect supply chains; there will be ongoing battles over the US budget deficit; and there is always the potential for geopolitical issues to boil over into currency markets. All the more reason for corporate treasurers to get a proper handle on their FX risk.
Download the Currency Impact Report