Multinational companies are buying more financial protection against swings in emerging market currencies, after being hit by a summer of volatility in countries that account for an increasingly large share of their business.

October 1, 2013 6:54 pm

Volatility pushes companies to buy more forex protection

By Delphine Strauss

Multinational companies are buying more financial protection against swings in emerging market currencies, after being hit by a summer of volatility in countries that account for an increasingly large share of their business. Citigroup, the market leader in foreign exchange trading by non-financial institutions, said its business with companies hedging exchange rate risk in emerging markets had risen 12-13 per cent since the sell-off in these currencies gathered pace in June.In the last six months, the Brazilian real has fallen 9 per cent against the dollar, the Mexican peso 6.2 per cent, the Turkish lira 10 per cent and India’s rupee 13 per cent. All have suffered an even bigger drop against the euro and sterling, dealing a blow to some consumer goods companies for which growth in emerging markets had recently offset the stagnation in developed markets.

“They don’t want to take a chance on currencies any more,” said Bernard Sinniah, Citi’s global head of sales for corporate foreign exchange. Hedging of emerging markets currencies accounts for about 40-50 per cent of Citi’s annual $4tn corporate foreign exchange volumes.

Fabrice Famery, head of European corporate rates and foreign exchange at BNP Paribas, said: “We believe that the demand for protection against emerging markets volatility will increase when corporates do their budget and implement their hedging plan in the fourth quarter and first quarter of next year.”

In discussions over the summer, European exporters among his clients had largely been adequately protected against emerging markets currency risk, Mr Famery said. But several importers had taken the opportunity of weak currencies to hedge their cost of sales.

The turbulence in emerging markets currencies follows a period in which companies appear to have become less inclined to hedge their exposure to exchange rates.

A triennial survey by the Bank for International Settlements showed a significant decline in forex transactions with non-financial customers, from $532bn in 2010, or 13.4 per cent of the total, to $465bn in 2013, or 8.7 per cent of the total.

This chiefly reflects the relative stability during that period of the dollar against the euro and sterling – the most important currency pairs for multinationals.

Mr Sinniah said companies had also been cautious because the uncertain economic outlook made it harder for them to forecast costs and sales: they had been hedging a smaller proportion of their forex risk, for a shorter period of time.

The pick-up in Citi’s corporate volumes relating to emerging markets currencies contrasts with unchanged volumes in the G10 group of developed country currencies.

Mr Famery said companies had become better at netting off foreign currency flows internally, and so limiting their transaction costs, while the trend for manufacturers to shift production closer to markets had created natural hedges against exchange rate risk.

Other forex market participants offer various reasons for the decline – including a post-crisis suspicion at some companies of anything that looks or smells like financial engineering.