The Corporate Treasurer’s "Currencies to Watch" Guide – Q1 2016

Corporate treasurers are no stranger to restless currency markets and the problems they can create for cash management and accounting, but few could have anticipated the turbulence 2015 brought to the table.

© Alan Schein Photography /Fuse/THINKSTOCK

The jolts began early in the calendar year, with the Swiss National Bank’s surprise decision on January 15 to depeg the Franc from an artificial cap against the Euro —.a move that unleashed waves of volatility into global currency markets.

As 2015 progressed, former emerging market darlings became the epicenter for currency market tumult. China unveiled its own surprise devaluation of the once tightly controlled Yuan in August. A depressed economic outlook coupled with sinking commodity prices and political troubles sank the Brazilian Real. Other currencies tied to commodities followed.

With economic prospects remaining flat for many emerging markets and reactive monetary policies on the horizon, high volatility will likely continue to plague currency markets in early 2016. And that’s bad news for corporate finance departments.

Beyond the impact on revenue, volatility compromises the integrity of currency rates that treasury professionals rely on for accounting, forecasting, reconciling balance sheets and other core functions. The accuracy of these rates is already challenged by the over-the-counter nature of FX, where rate providers offer data based on their own estimates, not what’s actually happening in the wider marketplace. Volatility further increases the likelihood that rates are obsolete by the time they hit the treasurer’s desk.

Based on these factors – economic outlook, volatility and difficulty in sourcing accurate rates – we have identified currencies that may prove to be particularly tricky for corporate finance departments in Q1 2016:

Chinese Yuan

Between surprise devaluations, bouncy stock markets, lukewarm economic indicators and a lift in retail sales, the Chinese Yuan could have arguably been the currency that left corporate treasurers and investors doing the most head-scratching in 2015.

The IMF’s designation of the Yuan as an elite world currency (alongside the Dollar, Euro, Pound and Yen) in late November should bring some stability and predictability to the currency, as China will relinquish some control to the financial markets. That said, the loosening of controls could also unleash uncertainty into the country’s economy.

In the near term, all signs seem to point toward an economic slowdown that could entail further cuts to China’s interest rates and reserve requirement ratio (which dictates how much banks can hold in deposits and lend to consumers). That said, retail sales continue to rise at or near double-digit figures, which signals success in the government’s program to steer China’s economy toward consumption.

An unexpected change to currency policy is never out of question with the Yuan. How corporate treasurers deal with the currency in Q1 2016 depends on what type of goods their businesses deal with. Slowing industrial growth will continue to hurt companies that export commodities to China. International retailers could see some growth as Chinese consumption increases.

Brazilian Real

The Brazilian Real has seen a spectacular fall from grace. In 2015, the Real has depreciated 40 percent versus the Dollar, as lower demand for commodities further squeeze Brazil’s economy which, like Russia’s, relies heavily on commodity exports. This further hurt Brazilian businesses, which were already feeling the pinch of a stubborn recession and tough austerity measures.

With major politicians continuing to be investigated for corruption or exiting office altogether, there is little confidence that the currency’s decline and economic growth will stabilize in the near future. As we write this, impeachment proceedings for President Dilma Rousseff have begun, putting proposed economic reforms in further doubt.

In spite of these difficulties, major corporations find themselves unable to pare down local operations very much. As the German car-parts maker Continental AG noted, the Brazilian economy is “too large to abandon.” On the plus side, consumption of domestic goods is on the rise.

2016 promises to be an especially tricky year for corporate treasurers who work with the Brazilian Real. For starters, the country has a tricky tax jurisdiction that requires corporations withdrawing capital from Brazil to justify why the money should leave the country. On top of this, the country’s proposed 2016 budget currently calls for a ‘financial transaction tax’ that would levy a 0.2 percent fee on currency exchanges and transfers.

Overall Outlook

Other currencies expected to demonstrate higher-than-normal volatility include the Russian Ruble, Turkish Lira and Malaysian Ringgit. In this dynamic environment, many corporate finance departments will continue to be challenged by the relatively rapid – and sometimes unexpected – fluctuations of emerging markets currencies in the first quarter of 2016.

Beyond the reaction to the Fed’s interest rate decision, there are a host of external developments that will continue to influence how these five currencies move: oil prices, geopolitical turmoil and unanticipated devaluations, to name a few.

Sourcing accurate rates already poses a challenge for treasury executives and others in corporate finance, especially for currencies that are thinly exchanged in the financial markets. These translate into a bigger spread, and wider range of rates. Beyond having a deeper understanding of how and why currencies fluctuate, there are a few steps treasurers can take to enhance the accuracy of the rates they source:

  • Be selective, knowledgeable and consistent when deciding where to procure FX rates. Currency markets are over-the-counter and widely fragmented. There are many prices that can be valid at the same time. Discrepancies in rate providers across different divisions, business units or regions are a prime cause of errors in international corporate finance departments.
  • Automate the procurement of FX rates data. This sounds like a simple step, but surprisingly, many major corporations still collect FX data on an ad hoc basis and plug it into a system. Best practice among Big Four accounting firms and major global corporations is to have an automated feed into an enterprise resource planning or financial reporting interface.
  • Increase the frequency of FX rate procurement. Sourcing rates regularly ensures the currency values being used for key functions across an enterprise reflect market conditions accurately. Many corporations still check rates at month-end or, at best, week-end. Daily rate sourcing is a must for corporations to ensure better decision-making across the enterprise.
As the cost of hedging currency risk continues to rise and as corporations seek to limit the cross-border currency hemorrhaging affecting their balance sheets, treasurers are being pressed to heighten their knowledge and visibility of FX rates. Given the currently unstable and unpredictable nature of the former emerging market standouts, these currencies are a natural place for treasurers to focus their energy in Q1.

Natasha Lala is Managing Director, OANDA Solutions for Business, a financial technology company that provides forex and CFD trading and currency information services globally.