The least we can say is that the last three years have put the markets to the test. While Europe was already struggling to generate growth, the social (Yellow Vests), health (Covid crisis), and now geopolitical (conflict in Ukraine) crises have all taken their toll on economic players.
Under inflationary pressure (because it is mainly qualified in services), the European Union realizes with the Russian-Ukrainian conflict the extent of its dependence on other nations, better provided with energy and food resources, as well as with industrial production capacity.
While many of us mocked protectionist policies across the Atlantic, themes like independence and self-sufficiency became more concrete and appealing.
In any case, the current tensions on raw materials, energy and food products (already at work during the health crisis, and reinforced by the Ukrainian crisis) inevitably have repercussions on the markets, and a fortiori on companies.
Uninformed and unprepared, many of them have largely minimized the currency risk due to market stress, and are now paying the consequences on their budgets and margins.
Real consequences for companies
If the events mentioned above (Gilets Jaunes, Covid, war in Ukraine) are of course exceptional in nature, and it was more than complex to anticipate them, they nevertheless have the “merit” of highlighting a major trend among companies with regard to currency risk: that of minimizing potential risks.
How many treasurers and CFOs have bet on deactivating hedges before finding themselves truly “glued” to the market in recent months?
If a company anticipates a rate of 1.20, but only obtains a rate of 1.09, the losses can be colossal… And for good reason, on a contract of 5 million euros, such a variation in the exchange rate can represent 550,000€ for the company, or more than 300 SMIC!
Generally, it is at the heart of these dynamics of tension that the economic actors notice their lack of preparation and realize that it is time to act. But, it is often already too late…
As for the other reaction (quite classic among French companies) consisting in waiting for a providential solution from the State, it is again an illusion.
Faced with the unexpected, stop reacting
By being ill-equipped and having poorly anticipated potential market risks, companies are in a reactive position with respect to macroeconomic events. This is a stressful position, which makes it impossible to make rational and informed decisions regarding currency hedging. Taking a step back to be cooler in your decision making is essential to face the current difficulties.
Il s’agit alors de trouver un juste milieu entre l’attention portée aux anticipations relayées par les institutions financières (qui valent généralement autant que des prédictions faites à la boule de cristal) et une véritable organisation structurée permettant de sauvegarder au maximum sa marge et son budget. Le tout, en évitant l’écueil dans lequel nombre de sociétés tombent encore : vouloir spéculer sur le marché afin de profiter des tensions actuelles.
It is then a question of finding a balance between paying attention to the expectations relayed by financial institutions (which are generally as good as predictions made with a crystal ball) and a real structured organization allowing to safeguard one’s margin and budget as much as possible. All this while avoiding the pitfall that many companies still fall into: wanting to speculate on the market in order to take advantage of the current tensions.
By digitizing its organization efficiently (to avoid the Excel ball and chain) and by evolving in a methodical environment, the company gives itself all the chances to make the best of things and optimize its strategy.
Si se couvrir systématiquement n’est pas non plus une solution viable, inclure des scénarios « au pire » et « au mieux » permet de se protéger quelles que soient les conditions du marché, et de se projeter plus sereinement dans l’avenir. L’action, plutôt que la réaction ! Par ailleurs, n’hésitez pas à tester vos compétences, quel gestionnaire de risque de change êtes-vous ?
While systematically hedging is not a viable solution either, including “worst case” and “best case” scenarios allows you to protect yourself regardless of market conditions, and to project yourself more serenely into the future. Action rather than reaction! Furthermore, don’t hesitate to test your skills, what kind of currency risk manager are you?
No, huge budget losses due to an unexpected change in exchange rates don’t just happen to others. Against emotional reactions, which consist in following the risky forecasts of the banks, or in trying to beat the market by speculating, it is better to keep a cool head and adopt a rational and methodical strategy.
To learn more about the very concrete consequences of the current economic tensions on companies, do not hesitate to follow our webinar Relation Ukraine / Russia: What consequences for the foreign exchange market? especially dedicated to this topic, on Wednesday April 20, 2022!