FX RISK AND CURRENCY MARKETS IN A US ELECTION YEAR
This article is written by GPS® Capital Markets Download Article Once every four years, the world witnesses a highly anticipated event: the US presidential elections, yet the influence of these elections on currency markets and associated FX risk begins well before November 5th. This holds especially true in 2024, which will see both current US President Joe Biden and Donald Trump, the probable Republican Party nominees, each seeking a second term, and where both candidate’s foreign and economic policies are well known. Historically, the US presidential election has been a catalyst for heightened volatility in FX markets. While we know past performance is no guarantee of future outcomes, there is much to be gained by observing the impact of the past three presidential elections: 2020 Biden vs. Trump, 2016 Trump vs. Clinton, and 2012 Obama vs. Romney. In this article, we will analyze the impacts and risks of each candidate by currency and recommend the best ways to hedge exposures that are open. IMPORTANT DATES First, let’s begin by looking at a timeline of important dates extending into the coming year that will likely have currency market-moving effects. Each date indicates a period of uncertainty—a potential driver of FX market volatility. By staying informed and adapting your approach to FX risk as the election year progresses, you can effectively hedge your exposures and protect against FX risk. THE CANDIDATES If current polling persists, the 2024 election will be the result of a Biden-Trump match. However, there is much speculation about the outcome of former President Donald Trump’s legal scrutiny and its effects on his candidacy. The front-runner for the Republican Party has a series of court dates from January through May, and their outcomes have the potential to change the landscape of the election significantly. If the present election probabilities hold true, with Joe Biden facing off against Donald Trump as the most probable scenario, then our focus will be on global trade negotiations and the impact a possible Trump win would have on tariffs. FX RISK DUE TO CURRENCY MOVEMENTS ON ELECTION YEARS USD In our analysis, we employed seasonal charts to evaluate the performance of the USD during election years. Since the election takes place on the Tuesday following the first Monday in November, dates can vary. Our observations encompassed daily movement between October 28th and November 25th of each respective year. The chart of the Bloomberg US dollar index illustrates that during this period, the USD exhibited a 3.8% increase in 2016 when Trump was elected, a 2.2% decrease in 2020 when Biden won the election, and a relatively stable movement in 2012 when Obama was reelected. This represents a 6% swing in the dollar’s value between the two presidential candidates. Source: Bloomberg US dollar index percentage movement, election years 2020 (yellow), 2016 (orange), and 2012 (blue). MXN The Mexican peso could be the currency that falls the most in the event of a Trump victory—in the month when he was elected, the USD appreciated 8.1% against the peso, whereas it depreciated 6.2% following Biden’s victory. Considering that Mexico is the United States’ largest trade partner, with a total volume of $736 billion in total trade transacted in 2022, the election will unquestionably present many opportunities and challenges for this currency. RELATED ARTICLE: Could You Be Managing Your EM FX Risk Better? Source: Bloomberg USD/MXN percentage movement, election years 2020 (yellow), 2016 (orange), and 2012 (blue). CNY A Trump victory could have a similarly negative impact on the CNY. During the month of Trump’s election, the USD appreciated 2.4% against the yuan. In contrast, the more sympathetic Biden saw the dollar depreciate by 2.5% in 2020. It’s worth noting that China is the United States’ third-largest trade partner, with $715 billion in total trade transacted in 2022. Source: Bloomberg USD/CNH percentage movement, election years 2020 (yellow), 2016 (orange), and 2012 (blue). JPY The Japanese yen could equally feel the pinch, surpassing the broader dollar index under a Trump win. During the month of his election, the dollar appreciated 8.1% against the yen, whereas in 2020, Biden saw the dollar appreciate 0.1%. Japan is the fourth-largest trade partner of the United States, with $239 billion in total trade transacted in 2022. Source: Bloomberg USD/JPY percentage movement, election years 2020 (yellow), 2016 (orange), and 2012 (blue). AUD The Australian dollar is a higher-risk currency that has the potential to exhibit greater movement compared to other major currencies, as indicated by its elevated implied volatility. In the month when Trump was elected, the Australian dollar experienced a 2.1% depreciation against the US dollar, whereas when Biden secured the victory, the Australian dollar appreciated by 4.6%. Source: Bloomberg AUD/USD percentage movement, election years 2020 (yellow), 2016 (orange), and 2012 (blue). Note that the rate is inverted compared to the other pairs. MONETARY POLICY The market is currently factoring in the likelihood of some aggressive interest rate cuts from the Federal Reserve. So, it’s worthwhile to examine the behavior of the cash rate in election years. The chart below illustrates the Fed Funds rate, with each election year represented by a different color. There doesn’t appear to be a clear pattern or consistent trend, as each election year corresponds to vastly differing points in the economic cycle. This may serve to validate the independence of the Federal Reserve. 2020: The Republicans lost power to the Democrats; rates were cut early in the year post-COVID to 0.25%. 2016: The Democrats lost power to the Republicans; rates remained at 0.5% throughout the year before increasing a further 0.25% after the election. 2012: The Democrats remained in control, with rates remaining at 0.25%. 2008: The Republicans lost power to the Democrats; rates moved lower in the backdrop of the Global Financial Crisis. 2004: The Republicans remained in control, with rates moving higher in the later part of the year. Source: Bloomberg Fed Funds Upper Target across the last five elections. CHANGES IN THE OPTIONS MARKETS The magnitude of risks, as well as the potential changes in the FX markets, can be observed as higher implied…
Franklin
Securing the Future: Building a Compelling Business Case
This article is written by Cobase With businesses facing more complex financial challenges than ever, the need for sophisticated treasury solutions like Treasury Management Systems (TMS) and Payment Hubs is becoming a strategic choice. However, securing the necessary budget for these solutions, particularly when direct ROI isn’t immediately evident, requires a well-crafted business case. The Challenge of Securing Budget Gaining approval for Treasury solutions in a budget-conscious environment is a common hurdle. In an era where financial prudence is paramount, investments in technology like a TMS, or Payment Hub, must be justified beyond traditional ROI metrics. This necessitates a compelling and comprehensive business case. Articulating the Need The journey begins with a clear articulation of the strategic need for a treasury solution. This involves: Incorporating Best Practices and Research Data Leading consulting firms like McKinsey & Company, Deloitte, and PwC emphasize the importance of digital transformation in the Treasury. Their research indicates that: Beyond Direct ROI: The Holistic Benefits While direct ROI is crucial, the broader benefits of Treasury solutions often provide a more compelling argument: Building the Business Case Crafting a persuasive business case involves: As we blend the rich insights from industry best practices and research data, we remember that at the center of it all is a human story. It’s important to understand the aspirations and challenges of your team, the vision of your leaders, and the collective goal of your organization. It’s about championing a solution that doesn’t just promise financial stability but also fuels strategic growth and innovation. Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information. Also Read
8 TIPS ON HOW TO COOPERATE EFFECTIVELY WITH AN INTERIM TREASURY MANAGER
This article is written by Pecunia Treasury & Finance B.V. Are you working with an interim manager and unsure of how to effectively cooperate with them? Look no further; we’ve got you covered! You’re most likely here because you know introducing an interim manager into your workplace can be a daunting task. For those who don’t know already, interim managers are temporary managers who are brought in to oversee an organization during times of transition, such as during a leadership change or a major project. If you’d like to learn more, Indeed has a blog explaining the definition of an interim manager in more detail. These professionals can be valuable assets to any team, but they can also present some challenges when it comes to working effectively together. In this blog post, we will provide 8 tips on how you can cooperate effectively with an interim manager to ensure a successful transition and a positive working relationship. So, without further ado, let’s dive into these helpful tips on how to cooperate effectively with an interim manager. Establish clear expectations from the beginning Establishing clear expectations from the beginning with your interim manager is important because it helps create a positive and productive working environment. Having clear expectations also helps foster trust and mutual respect, which are essential for a successful relationship. This ensures that both the interim manager and the company are on the same page and that they understand the roles and responsibilities they each have. Furthermore, it allows both parties to plan and prepare their work accordingly, resulting in improved efficiency and effectiveness. Finally, it ensures that expectations are met and that everyone is working towards the same goal. Be honest and concise when communicating with your Interim Manager Honesty alone is always the best policy when communicating with your interim manager; it’s the key element in successful communication with anyone in the workplace. However, honesty and conciseness in communication with your interim manager are essential to ensuring that both parties understand each other and that the project progresses in a timely and efficient manner. Be prepared to provide clear and concise explanations about the project goals and objectives, and provide a timeline for when tasks should be completed. Be open and honest about any challenges you are facing, and provide the interim manager with any relevant information or data that can help them make the right decisions. Moreover, it is important to maintain open lines of communication between you and your interim manager so that any questions or issues can be addressed quickly. Fulfill your Interim Manager’s requests, and explain your reasoning if you disagree If you disagree with a request from your interim manager, it is important to remain respectful and professional. Start by acknowledging the request, and then explain your rationale for why you believe it is not the best option. Doing so will show that you are open to discussing the issue, rather than simply rejecting it out of hand. Additionally, it is important to be open to hearing their point of view and be willing to come to a consensus. It is also important to be transparent with your interim manager about any issues that may arise, as they can help you find a solution that works for everyone. Don’t hesitate to explain the rationale behind any requests you cannot fulfill. Again, it is important to be open and honest with your interim manager in order to ensure a successful working relationship. On top of that, it’s important to be proactive and suggest alternative solutions to any requests you cannot fulfill. Doing so will help your interim manager understand your perspective, which could lead to a mutually beneficial outcome. Allow the Interim Manager to make decisions without interference The interim manager should be allowed to make decisions without interference, as long as they are within the scope of their role and responsibilities. This means that any decision made by the interim manager should be respected and not questioned. The interim manager should have the autonomy to make decisions based on the best interests of the organization without any interference from outside parties. This will ensure that decisions are made in the best interests of the organization and are not influenced by any external factors. However, it is important to ensure that the interim manager is aware of any restrictions or guidelines that need to be followed and that they understand the parameters of their role. Additionally, they should be given clear expectations and feedback on their performance. Respect your Interim Manager’s authority and don’t be afraid to ask for help Don’t forget that you take the time to listen to the interim manager’s thoughts and feedback. Your interim manager will have a wealth of experience to draw upon, and their advice should be respected and valued. In addition, make sure to stay organized and communicate regularly with the interim manager. Be sure to document the progress made while the interim manager is in charge so that it can be reviewed and discussed. Ultimately, be open to change and new ideas that the interim manager may suggest. Here are some personal responsibilities you can incorporate when working as a team: Your interim manager is there to help you navigate the transition and provide guidance, so make sure to take advantage of their expertise. Ask questions, listen to their advice, and work with them to ensure that the transition is successful. Lastly, use their experience to help you create and implement new processes, procedures, and protocols. Respect their authority and follow their direction, but also remember to provide your opinions and feedback. Give the Interim Manager the opportunity to develop a professional relationship Always remember the importance of giving the interim manager the opportunity to develop a professional relationship with the team, the staff, and the organization. This can be done by providing him or her with open communication channels and access to resources. This will help foster trust and understanding, and it will create an environment where the interim manager can demonstrate…
4 WAYS TO ASSESS YOUR COMPANY’S FOREIGN EXCHANGE EXPOSURE
This article is written by GPS® Capital Markets When you take a close look at any business’s operations, most planning and management are determined by the company’s size and vertical. When I’ve talked to executives about how they run their companies, the consensus is that there’s a mountain of difference between how to approach a small business’s operations versus a sprawling multinational’s. However, there’s one important exception to the rule, and it’s what we’re going to discuss in this blog: When it comes to doing business in multiple markets—no matter the details—all companies face foreign exchange exposure. How well a business assesses, forecasts, and manages fluctuating costs across currencies could be the difference between sinking and swimming. Take a look at these four ways you can start understanding your exposure. Treasury and finance professionals working to document and understand FX risks classify different types of exposures to track and mitigate them. Ultimately, the more data you can collect about these dynamics, the better you can optimize over time. Not all companies will face these exposures, but as a company grows, its FX risk can become more nuanced and bring different dynamics into play. Depending on how long you’ve been working at your company and how large/complex its operations are, it may be difficult to tease out the financial dynamics happening in each subsidiary. The most successful treasury professionals will be able to audit payments and transactions and find ways to consolidate or refine overall processes to save money or time. All refinement or optimization—the buzz word of the decade—begins with accurate data collection that can later translate into advanced analysis, visualization, and reworking of processes to mitigate FX exposure. Data aggregation tools, like GPS’ FXpert platform, keep track of your company’s activities across markets. This makes it easier to see exposure and create actionable plans for reduction of risk. With a complex view, different supply chain, acquisition, or payment procedures can be developed. If each of your subsidiaries does reporting differently, it can be difficult to get to a single point of data truth to understand exposure. Combine this with different operating languages, currencies, vendors, and lines of business, and you can get yourself into a big mess. Determining FX exposure, especially in a complex manner over many years, is most successful when you have all your ducks in a row and operate in a uniform manner. With FXpert, you can standardize payments with intercompany netting and report on all your transactions to meet regulatory requirements in one place. Trying to assess FX exposure on your own, even with an experienced in-house team, can prove too much for a treasury professional to handle. Whether your operation is expanding into new markets or acquiring subsidiaries with different transaction practices or software, bringing in experts who deal exclusively in FX covers your decisions and provides new ideas. Having seasoned experts available 24/7 and ready to help with any FX question provides peace of mind and the ability to get second opinions on any hedging strategy. Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information. Notice: JavaScript is required for this content.
Patrick Kunz
IS THERE NOW A TREASURY OPPORTUNITY ON COUNTERPARTY BANK DEPOSITS?
This article originates from Pecunia Treasury & Finance Bv in collaboration with Treasury Delta. Money Market Deposits have positive value again meaning that interest can be received on excess cash deposits. Just over a year ago treasurers had to protect excess cash from paying a negative interest but now the tables have turned and treasurers are now searching to optimise positive yields on their cash. Absolute rates are significant and volatile with Euro short-term rate (€STR) rates around 3.9% and one year Euribor just above 3,75% so there is a business case to seek out the highest risk-adjusted rates possible. A treasurer does not want to get extra return while increasing their risk so choosing your counterparty wisely is paramount when evaluating the credit rating and outlook and potentially spreading your investments across different counterparties. The business case for doing bank deposits or even looking into money market funds is clearly there. Especially if your excess cash is currently sitting at sub-optimal interest rates on a current account. A 10 million Euro bank deposit at 3.8% is c. €7,300 in interest each week. If you are already doing bank deposits with selected counterparties it should make commercial sense to get competitive quotes in from others who may also be in your banking group or looking to join it in the near future. A 20bps difference in quotes for interest is not uncommon so the Euro 10 million example above at 4% instead of 3.8% leads to a annual difference of EUR 20,000 in positive cashflow. So how can your organisation achieve these results in the most efficient and cost-effective manner?? Pecunia has a new and innovative way to solve this problem. Through collaboration with FinTech Treasury Delta, Pecunia will deliver a bespoke SaaS solution for your requirements and together we will evaluate the proposals in order to seek out the optimal result for your organisation. Via Treasury Delta we are able to get competitive MM quotes in within several days, all in the same platform. Easy to compare and fully transparent. The costs of the tool + consultant are very low due to the speed of the process. A favourable business case can be established promptly Aside from this bank deposit rfp type transaction, where the process takes days not months, additional treasury opportunities can be presented for your organisation. This is where Pecunia will add further value and present your CFO and Board with real value propositions from the marketplace. RFP’s are not boring and tedious anymore! Want more information about these opportunities. Contact:Pecunia at info@pecuniabv.nl or call/message Patrick Kunz at 0031636489548.
A Day in the Life of a Treasury Robot
This article is originally posted by our Partner Automation Boutique A concept that’s both fascinating and futuristic is the treasury robot. Let’s take a look into what a day could look like for one of our treasury robots: 6:00 AM – Bank Data Gathering with APIs and RPA 🦠My day doesn’t begin with coffee but with data collection. I use APIs whenever possible for a smooth retrieval of bank account balances and transactions from various banks. For banks that do not offer APIs, I gather the MT940 statements. For those without MT940 capabilities, I deploy my Robotic Process Automation (RPA) skills to log in to the banking portal and scrape the required data. After all data is collected, I ensure it is imported into the Treasury Management System and initiate the reconciliation process. When my human colleague arrives later, she only needs to review my work and manage any exceptions. 7:00 AM – Updating FX Rates with API Integration 💱 I then update the Foreign Exchange (FX) rates in our Treasury Management System. This is automated through the integration of an API from the ECB (European Central Bank), which allows for regular updates and ensures our financial operations use the correct FX rates. Before updating the system, I perform some checks to make sure that the rates I gathered are correct and complete. For any rates for which I have doubts, I notify my human colleagues with a message on Teams. 8:00 PM – Updating the Cash Flow Forecast Next, I focus on updating our cash flow forecast. By synchronizing data from our bank accounts, ERP, CRM, and historical trends, I create a draft of our updated cash flow forecast. My human colleague will later make manual adjustments based on her judgment before the forecast is used in decision-making. If she wants, I can help her spot patterns I can find in the data, such as seasonality in the cash flows or find those clients who always pay late at the end of the year. 10:00 AM – Crafting the Weekly Report 📊 Mid-morning, I start creating the weekly report on cash movements and liquidity positions within the group. Using Power Query, I transform raw data into insightful information, which is then automatically visualized in both Excel and Power BI. After a thorough review and approval by a human colleague, I email this crucial report to management. 1:00 PM – Counterparty Risk Management and Anti-Fraud Checks using APIs 🔠In the early afternoon, I focus on risk management and fraud prevention activities. I conduct counterparty risk analysis by interfacing with credit scoring companies through APIs. Simultaneously, I validate supplier bank account details, a critical step for maintaining our financial security and integrity. 2:00 PM – FX Risk Management 💱 After completing the anti-fraud checks, I turn my attention to FX risk management. I calculate currency exposures by analyzing upcoming payables and receivables in various currencies. Then, I determine the necessary trades and ensure they align with our company’s risk strategies and policies. Afterward, I input these trades onto the dealing platform. They are not executed immediately; instead, I notify my human colleague to review and approve them. 5:00 PM – Optimizing Overnight Deposits for Yield Maximization 🌙💰 As the business day winds down, I suggest the best strategy regarding automatic overnight deposits. This task involves analyzing various investment opportunities to ensure the best possible yield on our company’s cash reserves. Maybe one day my colleagues will let me also execute the transactions, it would be easy for me! So, that’s a snapshot of a day in my life, the life of a treasury robot. But here’s an important thing you should know about treasury robots. The treasury robot, as described, doesn’t actually exist as a single entity. In reality, what we’re talking about are various software robots, each specialized in different processes and automation technologies (like RPA, AI, APIs and Power Query). When these are combined, they create what can be metaphorically referred to as “the treasury robot.” This means it can be fully customized to fit the unique workflow and needs of any company, making the concept both versatile and adaptable. With the technologies we have at our disposal today, we can create this kind of “treasury robots”. Imagine the potential! How would you design your company’s ultimate treasury robot? Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information. Notice: JavaScript is required for this content.