Across the Atlantic: the year ahead in foreign exchange

Last year was, by anyone’s standards, extraordinary, and as all financial directors know, the foreign exchange markets have responded with unparalleled volatility.

From March, global chaos unfurled, and the markets took a flight to safety. As many sought quality and risk aversion, we saw the USD strengthening six percent versus the EUR and 12 percent versus the GBP in less than 10 days. Meanwhile, in the same 10-day period the USD strengthened 20 percent versus the MXN, showcasing how, especially in the early days of the pandemic, emerging markets have borne the brunt of risk-off market mentality.

Whilst some businesses pivoted and others shut down operations in both North America and the UK, all heads turned to preserving cash, renegotiating credit terms and postponing obligations. More businesses began to put currency risk front of mind: for example, our UK flow went up by 15 percent in March.

Towards the end of the year, as the US election intensified, culminating in victory for president-elect Joe Biden, the markets swung with vagaries of every swing state. Businesses reacted to the ongoing volatility, and we saw a 35 percent increase in deal flow in the UK and a 66 percent increase in North America. UK businesses, with their finger on the pulse of Brexit, shortened their hedging tenors if dealing in euros. Nevertheless, going into this year, the tenor of hedges for those dealing in dollars grew longer, and it is clear to see that businesses on both sides of the pond are eager to move beyond 2020, get business done and kick-start 2021 with an optimistic risk-on approach.

Facilitating international trade

As market order is shaken up by events such as Brexit, a new US administration and of course the global pandemic, it also presents fresh opportunities in new markets. In this sense, local banking networks will become pivotal in facilitating international trade efficiently in 2021.

If unexplored markets present new opportunities, they also require adaption to particular market specifications, for access and for licensing. For example, take China’s – CNH (offshore RMB currency) – which is both fully “hedgeable” and convertible. Coupled with the fact that CNY – (onshore RMB currency) – has strengthened 9% in 2020 versus the USD, the set up becomes advantageous for those doing business in US dollars to re-negotiate terms with Chinese vendors and send local currency through local networks as a potential way of reducing costs.

We can also take a look at Brazil. Over the last year, the cost of hedging in Brazil has dropped dramatically, prompting a resurgence in alternative investments pointed towards the country. Combined with deep liquidity, better access to capital markets, and a more accommodative central bank, hedging and moving money in and out of Brazil is now much more efficient than in years past.

Ongoing volatility

However, with a shifting geopolitical landscape, comes continued volatility. As we look back on 2020, we are likely to see this as an inflection point in the international payments arena. Risk assessment will be key going into 2021. We undertook a full analysis at the beginning of the pandemic, looking at counterparty credit risk, current outstanding positions, and a portfolio risk assessment, so that we could continue to deliver for our clients, even when volatility was at five standard deviations. We urge our clients to undertake the same exercise to identify potential risks in 2021.

Factors set to shape currency movements this year will operate on both a global and local scale. Globally, we are facing central bank policy reactions to economic normalisation, expectations of inflation, and the ongoing uncertainty of the pandemic.

Locally, in North America factors include loose monetary policy, a new administration, and a spotlight on trade with China as confidence in the economy builds. In the UK, a potentially steep economic downturn, new trade agreements and an impending financial services agreement with the EU, will all present significant currency risk.

Such intertwined spatial factors necessitate proactive risk assessment: specialist understanding not just mitigation of currency risk. This calls for a boots-on-the-ground approach to foreign exchange that addresses exposure head-on: analysing clients’ budget rates, risk appetite, supply and payment processes and plans for growth, whilst being guided by an outlook that has eyes on the wider global context.

Increased liquidity capabilities go hand in hand with volatility and so should stand to be a driving factor when it comes to the markets in 2021. To secure competitive pricing, regardless of volatility, financial directors should look for payments and hedging specialists with a diverse range of liquidity providers. Those who do not rely on just one or two will have the breadth to offer the deep liquidity required to continue offering competitive pricing in all currency pairs, products, and tenors.

Speciality technology

As traditional banks struggle to meet the growing demand for a smoother international payments experience, we see a greater role for specialists who can offer bespoke and innovative payment and hedging solutions within financial supply chains, for example, a multi-currency IBAN. In the UK (and soon in North America), we offer a multi-currency IBAN that has the ability to provide a singular receiving account which is able to receive and hold international payments in multiple currencies. Whereas most traditional banks or currency accounts can either receive only one currency, convert the incoming currency to the account’s currency instantly on arrival giving you no control on the currency conversion, or provide an account per currency. This creates greater efficiency and visibility whilst removing unnecessary costs.

Across the board, online platforms continue to play a greater role in currency risk management and payment creation. But the key here is developing propositions that go beyond simple spot trades. As staff continue to work remotely, and clients continue to expect competitive pricing, a complete service can only be achieved by those FX providers who continue to invest and innovate in FX payment and hedging platforms.

We’ve seen the use of moneycorp online go from strength to strength, having consolidated multiple payment channels into a single online platform, which enables remote hedging through forward contracts and global and local beneficiary validation. There’s also a greater call for API integration into existing systems as businesses look for seamless, secure and embedded access to their international payments. Those international payments firms who continue to invest in automation, straight through processing and reduced costs to move money globally, securely and quickly will be in good stead to support an increasingly remote and flexible workforce.

Valuing interaction

Finally, despite working from home continuing to be on the cards for most of the world, 2020 has definitely taught us the enduring value of forging customer relationships. Global collaboration within moneycorp has also grown as we have realized that we really don’t need to step on an airplane to share our team learnings and best practices.

Although face-to-face meetings may eventually return, international payments experts must keep finding new ways to engage, understand and educate clients, especially as uncertain times still lie ahead. Whether this is through webinars, social media, Zoom, or simply having the capability for customers to pick up the phone, there is no doubt that forging close relationships that keep clients ahead of the game remains essential. Businesses that are underpinned by high levels of service and great technology will set international payments specialists apart in 2021.

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