In the final part of our Payments Perspectives blog series, we take a look back at how corporate treasury specialists coped during an eventful Q4, and what they should prepare for in the face of another volatile year.
2016 has been the year of global shocks. Across Europe, the UK and the US there have been political surprises that have rocked the markets. From Trump to Brexit – volatility has reigned supreme and no group has felt this more than corporate treasurers managing payments and transactions across borders and in multiple currencies
With this in mind, here is a recap of the most volatile currencies we have examined in Q4:
· Sterling: In Britain, the public’s decision to leave the EU left even the most hardened political commentators puzzled, not to mention the polls. The decision led to a changing of the guard in Number 10, which further stocked the flames of uncertainty. The pound subsequently hit a 31-year low and despite some evidence of recovery, it now sits at £1.25 to the dollar. With Article 50 yet to be evoked and with debate raging over whether it will be soft, hard or something in between – there’s a lot in store for sterling in the New Year.
· Euro: The climate was just as difficult in Europe. While the Euro remained steady through the beginning of the year, it hit an all-time low in November against the Dollar as the market reacted to the ECB’s relaxed approach to monetary policy. And, the year ahead for the Euro is a political minefield. Having already suffered the Italian referendum, which plunged the Euro to a 20-month low, the calendar is chock-a-block with elections next year.
· Dollar: Across the Atlantic, a similarly surprising political event took place: the Trump victory. Another underdog in the polls, Trump’s triumph over Clinton initially sent financial markets into a tailspin. However, the markets recovered and the economic outlook now appears to be settled if not rosy. Of course, Trump is unpredictable and the year ahead will undoubtedly provide a number of obstacles.
Alongside the US election, the Fed capped a year’s worth of uncertainty by announcing a rate hike. Long expected, the hike has sent the Dollar to a fourteen-year high against a basket of major currencies, including sterling.
· Yuan: For treasurers dealing with payments with the Yuan, Trump’s victory will have them on high alert. That’s because throughout his campaign, Donald Trump championed the idea of a tariff on trade with China to reduce the large US goods trade deficit. Now that Trump is President-elect, both countries are on standstill to see how this will develop. If this policy is enforced, 2017 will be a period of economic warfare between the two giants. Treasurers in corporates heavily invested in China will have to navigate 12 months of tit-for-tat.
· Mexican Peso: Another currency closely linked to the American dollar is the Mexican peso. It took a hit this year over uncertainty about the country’s relationship with key trade partners following Trump’s election. The president-elect’s rhetoric of reducing business ties with Mexico sent the peso to a record low. Next year will reveal how this relationship will unfold, and considering that Mexico is the third-largest trading partner for United States, treasurers on both sides of the border will have a lot on their plate.
So how can CFOs and corporate treasury departments manage their payments as volatility continues into 2017? For every currency ill there is a different antidote, however there are a few best practices that apply across the board.
First, corporates based in any region need to assess their payment provider in the face of volatility. While your existing providers might have been a good choice in the past, they might not offer a competitive solution following the events of 2016. For example, for German exporters the low Euro is an opportunity to expand their exports into the US as their pricing is now highly competitive. Their provider however might not be the best fit for an expansion into the US and if they don’t have a footing in the region, German exporters might find they are losing profit to lifting fees and other inefficiencies.
Alongside this, in order to prepare for the next few months, international corporates need to ensure they have automated and transparent exchange rates as well as a broad view of historical data. This, coupled with strategic hedging strategies such as forward contracts will stand treasury teams in the best stead as we enter what will undoubtedly be another rollercoaster year.