Time to shine: corporate FX’s surprise glow-up

For the last few years, there was one question that even the most seasoned foreign exchange executive has struggled to answer: “How I can get graduate traders excited about foreign exchange when even clients are not interested?”

For most corporations, managing currency risks is just a by-product of their cross-border activities, and, when rates barely moved, FX was largely an afterthought.

This lack of interest is also reflected in banks’ internal hierarchies. A macro trading head at one large dealer describes it as a scorecard that people use to assess each business. At the top are mergers and acquisitions (M&A) “because that gets your name in the paper – that’s like glory”, he says. If you can’t do that, then the next best thing is equity capital markets. Then leveraged finance. Then debt capital markets.

Streaming giant Netflix is perhaps the perfect example of the need for an effective hedging programme

And finally, all the way down at the bottom is corporate FX and derivatives. “This was called ancillary income, and FX was a part of that,” he adds.

But this is changing dramatically as negative currency headwinds, sparked by increased volatility and a persistent strengthening of the greenback, weigh heavily on corporate revenues.

It’s not hard to see why. According to recent research from treasury technology firm Kyriba, North American multinational companies that generate more than 15% of their revenues from overseas reported an FX impact of $14.7 billion on earnings in the first quarter of 2022, a 221% increase compared with the previous quarter.

Streaming giant Netflix is perhaps the perfect example of the need for an effective hedging programme. According to its second-quarter earnings, the firm outlined that it did not use FX derivatives to hedge any foreign currency exposure, stating: “Revenues would have been approximately $619 million higher had foreign currency exchange rates remained consistent with those in the same period of 2021.”

But for many others, the changing FX landscape is requiring corporate treasurers to reassess their hedging strategies that had been designed in less volatile times in order to protect future revenue.

For some, it’s about adding new hedge notionals. US sportswear manufacturer Under Armour has increased its FX hedges significantly, increasing its total FX notionals from $14.3 million at the end of March 2022 to $56.1 million at the end of June.

Some advanced treasuries are forecasting future spot movements themselves, and might reduce hedge ratios in pairs they expect to move in their favour.

For banks, this is music to their ears, after a long period of low FX volatility that acted as a disincentive to hedging.

Corporates can offer big chunky trades that are often uncorrelated with the rest of the flow from the client base. At the same time, increased volatility means wider bid-offer spreads. More broadly, it also gives the bank the opportunity to build stronger relationships for other lucrative work down the line in the other (usually) more lucrative business areas.

At a minimum, companies are trying to lock in protection using forwards until the end of 2023 – even though they are expecting volatility to stick around for much longer – and some banks are beginning to see demand from clients to hedge their FX exposures out to five years. Other dealers are seeing the return of options trading among US corporates.

When asked if the head of macro trading at the large dealer has seen a better six months for the corporate FX business, he replies “not remotely close”.

Meanwhile, investment banking division revenues – which include M&A, equity capital markets and debt capital markets – are on the slide in the current environment, according to Coalition’s first-quarter investment banking index.

The hierarchy in some ways has flipped for the moment, and so arguably there’s never been a better time to be in corporate FX.