something to smile about? - Euromoney Institutional Investor PLC

What acorporateneedsThe modern corporatetreasurer operateswithin a risk-averseenvironment. Thetreasury is run not as aprofit-centre operation,but as a cost-centredepartment. It isaccountable for itsbottom-line.“Very few corporateclients run FX profitcentres,as they do notappear to have the timeto run positions andcover their needs for thecompany,” says BobEveling of SocieteGenerale.So, how have thechanges of focus andoperations withintreasury affected its FXrequirements?“We have seen adivergence away fromthe standard vanillaproducts into a morestructured approach tohedging FX positions,”says Neil Parker at RoyalBank of Scotland. MansGrunberger of SEBagrees: “We cannotidentify any majorchanges in hedgingtechniques during thelast couple of years, butgeration, but which will be the moredifficult to halt the longer it lasts. Ourassessment does mean that there is aserious risk of the dollar losing furtherground as long as there are - besides theconcern that the US current-accountdeficit is no longer sustainable - otherreasons (yield spreads, doubts about thedurability of the US recovery) suggestingthat the dollar is unlikely to makeup for its losses.”corporate clients havebecome moresophisticated incombining instruments.Eveling claims FXoptions have becomepart of their corporateclients’ arsenal againstFX exposure but in CF’sFX Survey in its Octoberissue, some of thecriticisms levelled at thebanks were that thebanks were offeringstructures and productsthat were toosophisticated and thatthey were overpromisingand underdelivering.“We send outthe best strategy bestsuited for our clients.On a weekly / monthlybasis we continue toprovide our in-houseforecasts and economicviews. We also provideour own ideas on FXrates and moves on adaily basis via directcontact on thetelephone.”Trevor Williams atLloyds TSB would notaccept such criticisms.“We aim to provide aservice corporates want;a service which involvescharts, keeping a closeeye on volatility andearly-warning signs oftrend movements aswell as any upside ordownside risk that wefeel a client needs to beaware of.”Demand varies, saysGrunberger. “Somecorporates want a shorttermview which reliesmainly on technicalanalysis, flow analysisand market behaviour,whilst the majority ofour corporate clientshave a medium or longtermview and wouldlike analysis whichcombines marketbehaviour andpositioning, structuralcapital flows, macrofundamentals, politicalanalysis.”Whatever thecorporate need, be itshort- or long term, saysMichael Schubert, atCommerzbank, the keyfor any successful clientbankrelationship isconsistency.“Consistency in ourforecasts is important.We try to elaborate inour reports the variousinterdependenciesbetween the variablesmentioned. It isnecessary that theamount of depreciationor appreciation wepredict for a currency isquantifiable from theclient’s point of viewand that changes in ourforecasts arecomprehensive.”Yen going from strength tostrengthA good FX forecast can act as an earlywarningsignal to off-set futureliabilities. The USD-JPY currency pair isa good example. Forecasting the resurgencein strength of the Japanese yenwould have been very profitable tomany of the banks’ corporate clients inthe past 12 months, who generateprofits in yen but later repatriate intoUSD-CHFTotal Position Frequency AverageCommerzbank 40 1 6 6.67RBoS 37 2 6 6.17Citigroup 35 3 5 7.00Lloyds 34 4 6 5.67SocGen 32 5 7 4.57SEB 31 6 5 6.20UBS 29 7 5 5.80AMEX 26 8 3 8.67JPMorgan 26 8 4 6.50Goldmans 24 10 3 8.00dollars. Equally, a good relationshipwith your FX forecaster may have convincedyou to take out a forwardcontract to pay for goods that youintended to purchase later on in theyear. “If the Bank of Japan hadn’t intervened,”says Williams, “I could seeUSD-JPY trading as low as 100 or even95. It certainly would have damagedtheir recovery.”Williams admits to being taken bysurprise by the Bank of Japan’s action.“I was very much surprised by how farthe Bank of Japan intervened. Theyneeded to prevent further deflationarybias against the yen, but I was still surprisedby the amount of dollars theybought.” So what other currenciescaught our forecasters off-guard?Parker and Schmidt say the SouthAfrican rand and the Turkish lira, whileEveling looks to the euro. “I expected arecovery when it broke back throughparity in early December 2002. Iexpected it to stabilise at around 1.18,which I consider fair value for the currency.”The current high level of theeuro will, he adds, be detrimental to arecovery in the euro zone.Mans Grunberger of SEB on theother hand was shocked by the impressivestrength of the Australian dollar.“Despite some question marks aboutthe global economic recovery, geopoliticsand Australia’s poor externalbalances, the AUD has been supportedby strong productivity growth.”CF would like to congratulate the top10 forecasters of 2003. It was a difficultyear, with some unexpected currencymovements. CF would also like to thankthe industrious forecasters who continueto reply to our monthly requestsfor information. It is extremelyappreciated. cfcorporatefinancemag.com March 2004 cf 33