North American companies lost more than $23 billion in the first three months of 2019 because of adverse currency moves. That means the average company lost $1 million a day on currency swings in the first quarter — the fourth consecutive quarter of rising losses.
In addition to trade policy uncertainty, supply-chain disruptions, and tariff changes, the currency dragon adds to the headaches of running an international business.
Managing currency risk in today’s fast-changing times requires more than just fancy financial instruments. Companies would be wise to prepare for continued foreign exchange risk on two fronts.
A Currency Swap is Not a Silver Bullet
CFOs may want to take the opportunity to revisit much more than just their currency strategies, such as:
- Asset-liability management programs to ensure adequate liquidity;
- Supply chain flexibility and resilience to protect against potential shocks; and
- Stress testing regional business strategies against currency swings, unanticipated tariffs, and potential supply disruptions from geopolitical strife.
Don’t Hesitate to Revisit the Handshake
Reacting to an increasingly complex world with complexity probably won’t produce the best outcomes. Keep it simple. Remember, large currency swings can mean unexpected benefits for your overseas customers, who may be amenable to revisiting contract terms.
We recently advised a consumer goods exporter who had seen their margins erode as the U.S. dollar strengthened. The exporter was so underwater that any hedging strategy was going to be expensive and yield limited near-term benefits. We recommended a simpler and less costly approach: ask the customer to consider renegotiating terms. The customer—in this case, a large retailer—agreed. Proof positive that customer dialogue can pay dividends.
This point-of-view is based on the article Enter the Currency Dragon: Adapting to Volatility in a Changing World.