The Foreign Exchange Managers’ Peer Group kicked off 2017 with a dynamic day and a half in New York, tackling a wide range of FX-related topics.
NeuGroup’s first meeting of the year, sponsored by Société Générale, covered everything from a member’s take on designing an effective hedge program using cash-flow at risk as its foundation, the options vs. forwards instrument-mix dilemma and how to get the best execution price when you trade, to the benefits of net investment hedging, the proposed changes to hedge accounting rules and outlooks for the US dollar and interest rates.
Membership does have its privileges, so here is just a small sampling of the key takeaways from the meeting:
Just how much higher can the dollar climb? SocGen’s chief US economist Stephen Gallagher provided a long list of factors supporting a still stronger US dollar, including likely Federal Reserve rate hikes, President Trump’s promised tax reform and protectionist policies, European elections potentially leading to an EU breakup, China’s economy slowing and the RMB weakening further. But none of those are secrets and are likely already priced into the currency. Highly liquid currencies such as the GBP and the JPY are at historically weak levels relative to the USD, suggesting those currency pairs tightening rather than widening.
Fed, ECB and BoJ policies more likely to converge than diverge. According to Subadra Rajappa, SocGen’s head of US rates strategy, the Fed is anticipated to pursue a moderate three to four hikes in 2017, but an unexpectedly strong dollar could slash that number, while more than one increase per quarter would be a “shock to the market.” Get ready for at least a mild recession over the next few years. Rate hikes are unlikely to arrive anytime soon from the European Central Bank (ECB) or Bank of Japan (BoJ), but at least they’ll back off their quantitative easing — the ECB by as early as 2018. SocGen foresees treasury yields rising to 2.9% and bund yields to 1%.
Identify, quantify and mitigate risk. A member shared his company’s three-step approach to managing FX risk. The goal is to present a straightforward analysis to management, starting with analyzing how much of their bottom line should be attributed to FX on a year-over-year basis. Using sophisticated methods, treasury can provide forward-looking metrics and cost-benefit analysis to aid decision making on hedge approach, ratios and tenors.
Options on members’ minds. In a lively round-robin, FXMPG members made it clear that as interest-rates rise, options are under consideration, but when to use them? Considerations include whether or not they have an options premium budget and if “taking a view” is something management is comfortable with. A member said her group had developed a way to determine when to use which – options or forwards – but struggled with when to pull the trigger on implementation.
FASB aims to make hedge accounting easier to get and keep. Rob Baer from Bloomberg gave the latest update on the Financial Accounting Standards Board’s (FASB) deliberations on proposed changes to hedge accounting rules. Although members are somewhat concerned about the “geography” of where hedge gains or losses will end up on financial statements, the new rules will greatly ease the operational burden to achieve hedge accounting and remain effective on cash-flow hedges, for example, plus make it easier to hedge commodities.
The next meeting of the FXMPG will be September 7-8.
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