Managing Corporate Currency Risk: The Road Ahead for Treasury Specialists

Already stretched to their limits in the face of multi-currency volatility, corporate treasury specialists will see little reprieve ahead as macroeconomic uncertainty continues. Having recently provided guidance on general FX best practices for corporate treasurers, this installment focuses on how specialists can enhance their FX risk management efforts in the months ahead.

Corporate treasury specialists may not strip the ‘most stressful occupation’ mantle from air traffic controllers anytime soon, yet there’s no denying that the job of managing a corporation’s financial risks has become much more taxing.

Multi-currency risk management was once a relatively straightforward part of the job, much less high-profile than ensuring a steady flow of liquidity or raising capital. Persistent and parabolic FX market volatility has changed all that. Now, CEOs, CFOs and shareholders are all watching currency management closely.  Couple this with the burden of regulation and criticism over where treasurers are parking their cash and it’s fair to say that the treasury specialist has been thrown into the spotlight.

The rest of 2016 and 2017 look to be no less stressful. A new FX ‘race to the bottom’ is effectively underway. Gauging emerging market currency stability continues to feel like a guessing game, as recent events in Turkey and Venezuela demonstrate. Even the US Dollar could come unhinged in the wake of the presidential election. Specialists find themselves having to make sense of the revenue losses caused by the strong USD and the gains from frozen interest rates and lower oil prices.

It should come as no surprise that FX rate management now attracts more resources than almost any other corporate treasury responsibility, as illustrated by PWC’s 2014 Global Treasury survey. Yet, while treasury specialists benefit from having a greater variety of tools to manage FX risk, the uncertainty ahead calls for more of a methodical, even restrained approach. In many cases, knowledge is greater than action:

1)     Restrain itchy trigger fingers: FX market sensitivity to economic news and data releases has reached new heights, where minor events lead to disproportionately big moves. Large swings can tempt specialists to reactively take larger-than-necessary risks, especially if the data/news is viewed in isolation from other economic indicators. Treasury specialists may make better medium-term decisions if they wait to execute when markets stabilize.

2)     Keep your plan global and your knowledge local: While each country has its own nuances and vulnerabilities, trying to act against each market in a tailored fashion can create headaches, especially for larger multinationals. A consistent global approach to FX risk management enables specialists to be nimble; couple this with accurate FX rate data, knowledge of the company’s local exposure and an understanding of the risks unique to a country and specialists can better manage local risk without creating inconsistencies.

3)    Prepare (a lot) for the unexpected: A year ago, the words “Brexit” and “Donald Trump, Republican nominee” might have drawn snickers. Not anymore. One of a treasury specialist’s best tools is forecasting – and there are fewer political and economic possibilities out there that aren’t worth running scenario analyses against. Spending more time modeling how certain events (and an amalgamation of events, for that matter) can affect credit ratios, dividend flows, product demand, etc. will help specialists move proactively. Once again, the integrity of FX rates and other inputs are crucial.

The next few months promise to stretch the treasury specialist’s ingenuity even further. Yet, unpredictability doesn’t have to stretch workloads to the brink. By harnessing the power of FX rates, knowledge and data alongside a more methodical approach to action, corporate treasury departments can make each risk management decision much more impactful.