Managing Liquidity During Turbulent Times:

Strategies for Managing FX Risk

Corporate and institutional treasurers around the globe are facing unprecedented volatility and unpredictability, both in their own business and the wider markets. In this environment, what new perspectives or approaches should treasurers be taking to manage their exposures?

Trading volumes have significantly reduced, putting pressure on cash flows, and supply chains are slowing down — as many industries are facing demand volatility. We are seeing an urgent flight to quality, with significantly increased dollar deposit levels, while demand for USD credit lines, in US dollars, is significantly increasing. FX markets are seeing volatility and reduced liquidity making devaluation risk, for non-functional currencies, a real challenge.

Recently, Citi cash management experts came together on a podcast to discuss how treasury teams are grappling with this unpredictability in the markets and actions to consider — and here are some of the main takeaways.

How are treasurers responding in an evolving situation?

Visibility and control over cash around the globe has never been more important. Treasurers are carefully forecasting cash flow over the next 3-6 months, to ensure that the business can survive — should inflows reduce or even stop. Companies are rightly preserving and shoring up every bit of liquidity they can. Treasurers are drawing down on external facilities and reviewing their intercompany funding processes, plus centralizing and holding cash at a group level as far as possible. Few are looking at radical new approaches — but are engaging familiar, proven techniques, such as target or zero balancing mechanisms, both domestically and cross-border. By doing so, they are in a better position to mobilize liquidity — while leveraging automation at a time when resources and remote working is hampering operations.

In Asia Pacific, where organizations have had longer to deal with COVID-19 implications, treasurers have been harnessing data from shared service centers, payment and collection factories to build out deeper working capital analytics processes, such as:

Addressing FX challenges

While maintaining access to cash, multinational corporations are also focusing on their FX exposures —as devaluation risk threatens inflows, the cost of funding foreign exchange outflows increases, and the value and credit risk of FX holdings held in more vulnerable countries and banks comes into question.

The FX markets were already starting to show signs at the start of the year, following years of extremely low volatility. Since then, liquidity in the spot and forward markets has dried up to the extent – or to an even greater extent – than we saw during the global financial crisis. Both G10 and emerging market currencies have been affected, as well as the USD, due to severe dislocation in the USD funding markets, while MXN and BRL have fallen to record lows.

Identifying FX risks

Before determining what action treasury should take to manage FX risk, the first step is to get a handle on the extent of risk and where it arises:

Hedging FX risks

Most corporates hedge in the FX forward markets, but as market liquidity has dried up, and volatility increases, treasurers may need to review their approach:

Checklist: Optimize Your Firm’s FX Exposure

  • Review cross-border flows, and identify opportunities to improve efficiency, particularly those with large volumes/value, given that there is an FX component
  • Implement automated multi-currency sweeping to eliminate manual conversions and free up treasury to focus on more pressing concerns
  • Automate FX payments below a certain size at pre-agreed spreads
  • Above this level, leverage an FX dealing platform wherever possible
  • Advise your bank of large, high priority payments in advance, to discuss optimal execution

To learn more, listen to the Strategies for Managing FX Risks podcast here.