The Events That Shook Forex Markets For Treasurers

The corporate treasurer at the multinational corporation is facing a particularly fierce global market today. Corporate hedging, key for businesses that need to minimize exposure to forex risk, is critical for a company doing cross-border operations. But technology is changing the foreign exchange trading game, and market volatility may be the only sure thing in this space.

That’s according to Beeks Financial Cloud CEO Gordon McArthur. The company provides traders and institutions with a virtual private server (VPS) service, using cloud technology to host an FX trading platform.

Beeks just signed on to provide its services for Seabury FXone, a FinTech firm that links companies, financial institutions and others with a trading execution system. On the heels of the announcement of their partnership, Beeks’ McArthur discussed the forex trading space today and what makes it a challenging, never-before-seen ecosystem for corporate treasuries.

The FX Market Has Changed

The forex trading space is certainly not what it was in years past, McArthur stated.

For one, as technology does away with geographic barriers for corporations, the FX market is perhaps more easily accessible for the corporate treasury today.

“As the world becomes a smaller place, businesses are doing business in different countries, different continents,” the CEO said. “All of that impacts the FX market. People have to move currency, have to change currency, so forex transacting is changing very quickly because of globalization.”

Technology, like the cloud, has washed over the markets to enable automated trading, faster trading and greater insight into FX fluctuations and risk exposure. Other factors have molded this landscape, too.

A recent report from Bloomberg Professional pointed to the strengthening U.S. dollar against the euro and Japanese yen, coupled with the increasing weakness of currencies in other markets.

“Amid the U.S. dollar’s bullish trend, corporate treasuries are increasingly using FX hedging to help manage risk,” the report stated. This involves treasurers collaborating with their banks and FinTech providers to forecast the direction of the FX market, while maintaining compliance with corporate policy on hedging.

And, despite more players in the game, the demand for increased speed — and heightened security — is unwavering, McArthur said. Technology, too, makes this possible.

“It’s all going to be fast, but financial transactions worth trillions of dollars are sent — that all needs to be secure,” the executive explained.

Which is more important: speed or security? McArthur laughed at the question and declared, “Both.”

Seismic Shifts

On top of global market evolution and technology’s impact on the space, according to McArthur, there have been a few, specific events that led to more sudden overhauls in the FX markets.

For example, he said, the U.S. is no longer the world’s leader in FX trading.

“The biggest country by volume is Japan,” said McArthur. “It overtook the U.S. a couple years ago. Japan is a massive market, but it’s not particularly an easy one to crack.”

And one decision by Swiss National Bank (SNB) last year completely changed the game, the executive said.

In Jan. 2015, SNB unpegged the Swiss franc, suddenly unfixing the franc’s exchange rate with the euro, which had been in place since 2011.

“A number of hedge funds across the world made big losses,” stated The Economist following the decision. “The Swiss stock market collapsed.”

According to McArthur, this was historic. “It was very big news; that was perceived as a once-in-a-lifetime volatility event,” he said. “That changed a lot of how the market operates, changed the dynamics of the market.”

He added that, while the forex markets have always responded to socioeconomic and political events, this was a pivotal moment for traders and corporate treasurers, most notably in how they mitigate risk.

“If anything, the FX market is becoming more volatile,” McArthur said. “Brokers have to adapt,” noting that several traders went bust following SNB’s decision. “A lot of them are trying to make sure they have proper risk control, so in a big event like that, they manage risk accordingly.”

The same goes for corporate treasurers. Recent research from East & Partners found that small and medium-sized enterprises are especially unprepared for the contemporary hurdles of FX risk mitigation, with less than a quarter of SMEs surveyed in the U.K. and France prioritizing protection against risk from FX fluctuation.

Deloitte soon followed with its own analysis of treasurers’ ability to mitigate FX risk, with its U.K. Global Treasury Advisory Services finding that corporate money managers are overloaded with data when sorting out FX risk exposure.

“The challenges in reporting on FX risk have always been around, but as companies become ever more international and a period of relative calm in the FX markets has turned unsettled, this is likely to have an even greater impact,” the practice’s partner, Karlien Porre, said at the time.

The de-pegging of the Swiss franc proves even the largest, most seasoned traders aren’t invincible. Corporate treasurers will continue to be tested through upcoming events, too, like the potential of a U.K. Brexit and the ongoing struggles of the Chinese yuan.

That market volatility that McArthur recognizes is unlikely to settle anytime soon.