Treasury and finance professionals in the manufacturing sector weighed in on how recent developments are impacting FX hedging during the Industry Roundtable Luncheon, sponsored by Fifth Third at the 2016 AFP Annual Conference.
As facilitator Martin Trueb, senior vice president and treasurer for Hasbro, put it, “everyone notices when hedging doesn’t work, and they’re happy when it does.”
The changing FX market
Trueb noted that for years, the U.S. dollar has been the de facto currency in which everything trades. But going forward, other currencies may come to the forefront. “Eight years ago, nobody hedged Chinese currency; now it’s one of the top three or four currencies in the world. Before, you could only hedge out a few months, now you can hedge out five years. That’s something that’s relatively new and it gives us the opportunity to partner with our businesses,” he said.
He added that one of the more recent hedging challenges has been organizations either being always long or always short U.S. dollars. “Nobody complained about it when the dollar was getting weaker and other currencies were getting stronger,” he said. “When the dollar got strong, suddenly that became an issue. All of a sudden, a lot of things we were doing in the U.S. became expensive.”
Suddenly, the “weeping, wailing and gnashing of teeth” associated with corporate allocations became very loud, Trueb said. As a result, companies are readdressing where they locate shared services. “They’re no longer cheap to have them in the U.S.,” he said.
However, China isn’t as cheap as it used to be either. Hasbro, which has had shared services is in China for years, is now looking at other parts of the world. “We’re not going to walk away from China, but as we grow, we’re looking for new opportunities,” Trueb said.
One practitioner noted that the uncertainty following the Brexit vote has had an impact on her currency. “The first day that happened, we saw quite a bit of fluctuation,” she said. “We do a lot of business in Europe and in the UK in particular, so that obviously had some impact on our currency what we need to worry about in the future.”
Another treasury professional noted that her organization has been operating without a hedging program. But due to heightened FX volatility, it’s aiming to put one in place in 2017. “I know that when Brexit went into effect, we had a large exposure in British pounds,” she said. “So it caused us to move some funds around.”
Trueb joked that there is “nothing like a currency crisis” to encourage companies to reassess their FX strategies. He asked if other attendees were in the same boat; creating more sophisticated hedging strategies due to all the volatility.
A treasurer for a U.S. farm equipment manufacturer responded that his organization has begun to go global in recent years, exporting to Canada, Europe and South America. As a result, he is in the process of setting up an FX hedging program. “Our primary exposure is only in Canadian dollars right now because they’re the biggest purchasers of our products,” he said. “But slowly but steadily, we have been getting orders from Europe, as well as South America. So we want to set up that program.”
Another practitioner noted that when setting up a hedging program, especially in Europe, it is essential to make sure you are fulfilling all of the European Market Infrastructure Regulation (EMIR) requirements for reporting on derivative contracts and implementing risk management standards. “It’s not as easy as it used to be,” she said.
Trueb agreed, stressing that corporate treasury and finance professionals can’t afford to sleep on regulations when entering a new region. “We think it’s just the banks that have to put up with all the compliance—that’s no longer true,” he said. “We in the corporate world are getting infected by the disease. So as you go international, compliance is critical, and you need to make that whatever systems you have and your partners are familiar with what needs to be done.”
He added that this is one area where financial institutions can be a big help to corporates. “Hopefully the people who have been doing this for a while and can point you in the right direction,” he said. “Getting someone to help you ask the right questions is really important.”