FX: Corporate hedging goes forwards – and backwards
While all the conditions for increased corporate enthusiasm for foreign exchange hedging appear to be in place, uneven demand suggests lack of consensus on how best to manage currency volatility.
Given the ongoing uncertainty around Brexit and the resulting currency fluctuations, it would be reasonable to expect that corporate focus on hedging has heightened – or at least remained consistent – over the last year or so, with an attendant rise in demand for forwards to mitigate FX risk.
However, conversations with brokers reveal a more nuanced market where forwards volumes are up at some firms and down at others, with corporates appearing to be willing to take their chances on currency movements.
Carl Jani, Argentex
Carl Jani, co-CEO of Argentex, which manages foreign exchange transactions for clients across EMEA, says that despite trading 28% more currency last year than in 2017, the percentage of that volume represented by forward contracts at his firm fell from 42% to 32% in 2018.
That trend has continued into the early months of this year, during which time only 20% of the firm’s trades have been made through forward contracts.
This decline in the proportion of corporate clients hedging their currency risk forward is indicative of the tentative mentality of the market.