Analysis: Dollar's gyrations raise hedging costs for U.S. companies
06/02/2023 06:30
By Laura Matthews
NEW YORK, Feb 6 (Reuters) - Wild swings in global
currencies hammered corporate earnings in the past year, and
while forex markets have gotten less choppy, some companies are
seeking ways to guard profits and lower hedging costs.
Currency volatility drove the J.P. Morgan VXY G7 Index
.JPMVXYG7 in September to its highest in more than two years.
Volatility is still elevated at 10.1, above a 10-year average of
8.34.
Currency gyrations hit corporate behemoths like IBM, which
cited FX in reporting a $3.5 billion decrease in its 2022
revenue in fourth quarter earnings, while Facebook parent Meta
Platforms said its $32.2 billion revenue last quarter would have
been $2 billion higher if not for currency headwinds.
In the third quarter of 2022, North American and European
companies reported $47.18 billion in negative currency impacts,
26% steeper than the loss in the previous quarter, according to
Kyriba's Quarterly Currency Impact Report released on Tuesday.
"FX Volatility is a critical concern for corporate CEOs and
their finance chiefs even as the (dollar) has weakened
against... other currencies that US corporates are exposed to,"
Andy Gage, senior vice-president of FX solutions and advisory at
Kyriba.
The dollar is down more than 7% against a basket of
currencies over the last three months, after rising to a 20-year
high in 2022. This may be welcome news for companies looking to
regain some of last year's losses, but "volatility remains
especially concerning as organizations finalize year-end
reporting and prepare guidance for 2023," Gage said.
A strong dollar means income earned overseas for U.S.-based
companies is worth less when converted and makes U.S. goods less
competitive abroad. Though the dollar has pared its rally,
strategists expect more gyrations in currency markets this year,
as central banks adjust monetary policies to fight inflation.
Volatility, which causes wider bid-ask spreads and makes
hedging more expensive, is causing companies to reassess their
hedging programs.
LOOKING FOR OPTIONS
Companies typically use FX forwards to lock in future
exchange rates to minimize currency risks, allowing them to
agree an exchange rate ahead of time.
As the Federal Reserve aggressively hiked U.S. rates,
forward points have increased across many currency pairs
containing USD, said Amol Dhargalkar, managing partner and
chairman at Chatham Financial.
Refinitiv data shows that price on a three-month EURUSD
forward rose to 65.52 in December from 20.61 in January 2022.
For the British pound it was 23.77 from -5.70 for the same
period.
"There's a psychology and a desire not to lock in lows or
highs, depending on which direction you're going on the
currency," said Dhargalkar.
Some companies are using options to protect against losses
caused by exchange rates. This could mean they will benefit if
currency fluctuations work in their favor.
Abhishek Sachdev, CEO at Vedanta Hedging in the UK, said 30%
more of his mid-market clients are using options than a year
ago.
Though most FX options trading happens bilaterally with
banks, the volume of listed FX options at CME Group rose 16%
year-on-year in 2022, representing an average of more than
42,000 contracts daily or the equivalent of $4.4 billion
notional in trading.
Options have their own drawbacks, sources said. Volatility
has increased the costs of using options to hedge, creating one
hindrance to wider adoption, said Dhargalkar. For instance,
implied volatility on a six-months at-the-money EUR/USD option
in early December was around 9% versus 6% a year ago, according
to Refinitiv data, meaning companies were paying more for the
rights that options provide.
SPREADING BETS
Another way businesses are trying to minimize hedging costs
is by spreading currency management around to more brokers
outside of their main clearing banks, hedging advisors said.
While most currency trading still happens via major banks,
third-party firms have grabbed market niches.
Revenue at Argentex Group, a riskless principal broker, has
risen 63% from to 2021 as FX volatility elevated corporate
hedging needs. MillTechFX, a division of independent currency
specialist Millennium Global Group has been doubling its number
of clients, pushing up its monthly revenues more than 130% since
August.
While currency gyrations have ebbed and hedging costs have
declined, “volatility and inflation remain a concern for many
companies,” Kyriba’s Gage said.
(Reporting by Laura Matthews; Editing by Megan Davies and David
Gregorio)
((Laura.Matthews@thomsonreuters.com;))