Last year the talk was all about Brexit. How UK companies needed to better manage foreign exchange risks due to uncertainty and subsequent volatility in the currency markets. We all know what the talk currently is. Yet, somewhat surprising, FX management is very much ‘business-as-usual’.
Even though these are exceptional times, the approach for companies managing these risks remains the same. Although it is too early to start using terms such as “post” Covid 19, from an economic perspective, we are seeing foreign exchange activity in the UK resembling more the old norm than any new norm.
Getting Some FX Perspective
We are also now seeing some shoots of optimism. Back in March, a lot of our UK clients’ activity was related to running mark-to-market reports. Understanding whether their outstanding fx positions were ‘in’ or ‘out’ of-the-money i.e. do I owe the bank/broker or does the bank/broker owe me?
Not surprisingly, companies were looking at how much hedging they had in place. In a lot of cases finding they were over hedged as businesses globally took stock of the inevitable slowdown. Our internal data showed a spike in those companies running valuation reports.
We interpreted this to mean companies were likely to have too much hedging in place. Therefore, potentially wanting to know whether these positions were in or out of the money and what options they had?
Close out, if in profit, for some much-needed cash – or roll forward, if out of the money (provided their bank/broker allows them). All in the expectation activity will increase and those contracts will be able to be used at a later date.
What we have seen in the last couple of months is UK companies appear to have a better handle on their prospects going forward – especially cashflows. Certainly, a lot of organisations are suffering. Especially if they are exposed to the travel or hospitality sectors.
Equally, many are coming out the other side and returning to business-as-usual. As governments push to open up the economy, we are seeing activity increasing. For those with foreign exchange hedging requirements, it has been mostly a time of consolidation. But we are seeing some signs of return to more normal trading conditions.
This is being reinforced by the observations of our channel partners. Again, our internal data shows companies are beginning to deliver contracts previously pushed out due to changing forecasts or being restructured into option contracts.
Need for Greater FX Risk Visibility
We are in extraordinary times but none of this is extraordinary in terms of fx management; how you manage foreign exposures is business-as-usual. Understand your position, re-adjust if conditions change and continue to make hedging decisions – even if it is to do nothing.
Customers are also telling us having tools to give greater visibility of this key information is paying off. It means the shocks are lessened, and thought about in advance, saving time and money. If you haven’t done so already – take a look at our Hedgebook Exposure Tool – which provides visual clarity and a better understanding of FX positions.