When considering their key priorities for risk management in 2022, it is important that corporate treasurers first gain a deeper understanding of the current global currency backdrop.
FX volatility is again trending upwards, and we expect this to continue well into the new year, driven by potential economic and political factors.
Against this backdrop we believe it is more important than ever that those trading in FX gain a transparent view of their execution set-up, streamline their operational workflows and implement hedging strategies in order to carefully manage their currency exposures in the year ahead.
The top-level outlook from Millennium Global’s Q1 2022 Global Currency & Macroeconomic Highlights is that the impact of the pandemic is still going to be felt in markets across the board and that policy diversion will be the key driver of currency markets in early 2022.
With the Fed likely to end its purchases at the March meeting, Millennium’s macro team expect rates to be raised by May at the latest, which should support the dollar against the euro, the yen and the Swiss franc.
In the UK, Millennium’s macro team’s view is that inflation expectations are clearly above average, with Brexit compounding the ongoing impact of the pandemic.
The macro team also believes the impact of the pandemic will be particularly felt in Europe where COVID-19 cases have been on the rise, making it unlikely that the European Central Bank will raise rates this year.
Cloud-based tools are being increasingly utilised to digitise and automate the entire FX process as a method to improve efficiency and reduce cost. This quest for workflow efficiency, streamlined processes and best execution is a key trend observed across the entire FX industry.
We have seen a rise in the outsourcing of specific FX functions, mainly those that are deemed ‘non-core’, to improve efficiency and achieve best execution. This is evidenced by research from HSBC and Acuris, which found that 44% of CFOs in larger companies have outsourced some of their day-to-day functions.
Gaining visibility on where currency risks lie within the organisation and performing continual reassessment of these risks have taken precedence. This process is not static, as both businesses and markets are continually evolving, meaning spotting the risks is not plain sailing. For example, 57% of CFOs say they suffered lower earnings in the past two years due to significant unhedged FX risk (rising to 77% in Europe, the Middle East and Africa) according to HSBC's 2021 Corporate Risk Management Survey. These concerns are being amplified in a market environment characterised by rising volatility. As part of this trend, we have seen a notable uptake of transaction cost analysis (TCA), both within treasury and across the entire FX industry, as firms seek to get a handle on hidden costs and ensure best execution is being achieved.
The impact of environmental, social and governance (ESG) factors reaches well beyond treasury and FX. But, in FX specifically, ESG-linked derivatives are now beginning to be tested owing to increasing client-side demands on more sustainable investment options. Questions are also emerging around how FX execution itself can become more sustainable, with businesses now starting to consider how this may be quantifiable.
Although this may seem like a monumental task, by focusing on the ‘G’ part of ESG (governance) we can begin to make substantial progress towards our sustainability goals. Having strong governance around best execution practices, supported by regular, independent TCA, could pave the way for introducing more sustainable practices in FX.
With these trends in mind, we think it’s crucial that corporate treasurers seek out solutions and partners that provide them with automation, outsourcing capabilities and advice, transparency and sustainable practices. This will enable them to optimise their FX risk management processes to protect themselves against the threat of currency fluctuations and help enable their organisation to thrive in 2022.
Eric Huttman is CEO of MillTechFX
