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Treasurers Prepare for More IR and FX Volatility

  • By Nilly Essaides
  • Published: 5/1/2015

After a prolonged period of the U.S. dollar strengthening, the USD took a tumble against the euro recently as the outlook for U.S. interest rates grew murkier and slower economic activity in the first quarter of 2015 may delay Federal Reserve action on a rate hike. Prolonged lower rates would affect the dollar strength and create two big problems for American companies:

  • Many currently use hedges designed to protect their results from a continuously rising USD
  • They remain challenged by where to park excess cash, and the prospect of continued low rates makes this challenge even harder.

In a recent series of roundtables held by the Corporate Treasurers Council, many treasurers in attendance reported that they are reviewing their hedging approach as well as their investment policies given the negative interest rates in Europe and the low returns in the U.S.

Companies that jumped on the hedging bandwagon late in the game are now faced with hedges that may actually yield losses, compared to organizations that have been hedging the dollar all along and have been mitigating the pain of the rising dollar. In some cases, according to treasurers, the gains on the hedges were a big contributors to European margins, as sales fell against the weaker economic background. But companies that started to hedge later in the game had to pay more and are not locked into expensive hedges that may yield losses if the dollar falls.

On the investment side, the low interest rate environment in the U.S. and negative rates in Europe have prompted many companies to take another look at their investment policies. Many of these policies were written and approved after the crisis of 2008, and now appear overly restrictive.

Companies are moving into riskier investments. The most recent data from Clearwater Advisors shows corporate debt represented 47.4 percent of all corporate cash at the start of April, a 0.6 percent increase over the prior month. Meanwhile, CDs shed 0.17 percent to end March with just 2.1 percent of all cash. Commercial paper fell 1 percent to represent 6.4 percent of all cash.

To make better investment decisions, companies are looking to segment their cash into operating, mid and long-term cash so they can stretch out their investment options and earn higher yields. The decisions are further complicated by concern about money market funds (gates, liquidity), with many companies pulling out altogether.

“You need to pay more attention to what’s operating cash and what’s excess,” advised a seasoned treasurer. “The question is what to do with that extra cash? Where to put it? Banks are not eager to take deposits anymore,” she said.

That’s really forcing companies to put money in alternative investments but, the treasurer added, “that’s harder to do if you don’t have a pooling or netting structure in place. It also creates currency issues if you’re converting euro cash into dollars. The big picture is that we’re going to invest in more bonds from a policy standpoint that means taking more risk but the current policy no longer fits the environment.”

More insights for treasurers can be found at the CTC Update.

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