We look at how the latest rate hikes from the Fed and Bank of Canada effects accountants, treasurers and financial officers working for major corporations.
In a world rife with geopolitical unpredictability and macro uncertainty – many corporates currently hang their decisions off any monetary policy snippets emanating from Central Banks. A third-rate hike since last December from the Fed, coupled with the Bank of Canada’s first rate rise in seven years, are two major policy announcements recently that affect businesses heavily exposed to the dollar and loonie.
But while the Fed’s rate rise was anticipated, the Bank of Canada’s decision, driven in part by continued uncertainty surrounding trade and commerce with the U.S. in this Trump era, is somewhat of a sea change. Bucking the trend of continuously low rates since 08-09, the Bank of Canada is now trying to do what any Central Bank does after a prolonged period of low rates – curb inflation.
Any attempt to try and put the brakes on inflation is, of course, welcome news to the man on the street. But for corporates reliant on any move from the Fed or the Bank of Canada to understand their market risk, these recent rises could pose a problem. This is because the data supplied by both banking behemoths is only for reference, and not supposed to be used when evaluating transactions or market risk. Of course, the recent rate hikes should certainly be reflected in any corporates financial reporting. Accountants, treasurers and financial officers working for these firms cannot rely on this information alone to understand the true extent of their risk exposure. To better understand a firm’s risk, a true market price is required. However, due to the OTC nature of the FX market, where there is no single source of currency rates, this can be like looking for a needle in a haystack.
While there is no magic wand, there are best practice principles that companies can look towards. First, in order to reach the holy grail of achieving a true market price, corporates need a far deeper knowledge of the inherent FX market complexities. This could involve taking an average price from a wider pool of data over a one-day trading period. After all, as a 24-hour asset class, currency markets are open all hours on a global basis. Also, beyond Central Bank rates, treasurers and financial professionals need a variety of other data sources. This could include yield curves or even a new replacement for the recently binned LIBOR rate. As important as having more information, is ensuring that the data is accurate. Hence why automation has become the new standard for finance and treasury professionals to manage cash and FX risk operations. Firms need to avoid manual processes and plain fat-finger mistakes to ensure that they have reliable data in place for exchange rates – rates that are accurate and available every single day.
Then there is the delivery of the data through an API, which guarantees an uninterrupted flow of up-to-date information. Cash management is the other crucial aspect to all this. Each transaction is different, as are the goals and constraints of parties involved. This is why accountants need to carry out transaction planning based upon reliable data that helps hedge risks associated with any unexpected Central Bank announcements.
Though the latest changes from the Fed and Bank of Canada are key for any business trading dollar/loonie, they clearly cannot be relied upon as the sole source. Modern finance and accounting professionals who are leading global operations, need a comprehensive range of data to retrieve accurate and reliable market rates, in addition to Central Bank exchange rates, in one single solution.