After a volatile 2015, this year is set to be full of uncertainties as has already been shown with the fluctuating rate of Sterling because of the approaching Brexit referendum. Deloitte’s Global Treasury Advisory’s first global foreign exchange survey ‘Continued Evolution’ found that different expectations around interest rate policies, the potential depegging of some currencies and other actions are all expected to drive FX volatility.
Natasha Lala, managing director at OANDA Solutions for Business, highlighted that certain currency movements had resulted in such fluctuation. “From the SNB’s shock decision to depeg the Swiss Franc against the Euro, to China unveiling its own surprise devaluation of the once tightly-controlled Yuan - to say 2015 has been an eventful year for FX would be an understatement. It’s hard to think of another year in recent memory that has seen so many periods of volatility,” Lala said.
Deloitte surveyed 133 corporations which represented a range of geographies and industries and 22% thought that inadequate financial risk or treasury management systems were an obstacle to moving forward, but only 7% thought that inadequate FX skills and knowledge was a problem.
The survey also found that 56% of respondents felt that lack of visibility of FX exposures and reliability of forecasts was the biggest challenge faced by corporations. Lack of visibility is important as this is where risks go undetected - companies that have successful FX hedging strategies are those that have invested in the right exposure identification technologies.
31% of corporations surveyed rely on three or more sources in order to identify exposures, which indicates that companies need to focus on achieving real time integration of different systems to drive visibility and reduce inaccuracy, according to the Deloitte report.
Increased disruption in this area has proven that visibility is important as Lala explained using examples of currency fluctuations last year. “A consistent fall in commodity prices has been a big disruption on certain currencies – such as the Russian Ruble. With Russia’s economy so dependent on oil exports, lower prices have significantly hurt businesses. Companies that rely on Russia for raw materials and commodities, especially European companies, will continue to be affected by the currency’s volatility,” Lala said.
As well as lack of visibility, lack of automation is also essential as the traditional sector starts to enter the digital space, however, the survey found that 62% of participants are still using manual forecasts. 56% use a financial risk management system or a treasury management system to automate operations that prevent foreign exchange risk, which could mean implementing technology to help companies with deal capture, general ledger and accounting postings or exposure capture.
We are yet to see if automation will play a major role in how companies grow this year, but Lala predicts which currencies we should be on the look out for in 2016. “The Brazilian Real is worth keeping more than one eye on. The Real has seen a spectacular fall from grace this year, depreciating 40% versus the Dollar, as lower demand for commodities has halted Brazil’s economic prosperity,” Lala predicted.
Lala continued to say that as economic prospects are remaining flat for emerging markets and with reactive monetary policies approaching, “high volatility will likely continue to plague currency markets in early 2016. Not great news for corporate finance departments.”