Companies step up FX hedging after big moves in EM, dollar

Mon Oct 21, 2013 1:09pm EDT

* Companies hurt by volatility in EM currencies, dollar

* Citi says corporate hedging volumes up 35 pct year-to-date

* Uncertainty over Fed stimulus makes companies wary

By Jessica Mortimer and Anooja Debnath

LONDON, Oct 21 (Reuters) - After months of volatility in emerging market currencies and deep uncertainty over the outlook for the dollar, bruised companies have stepped up hedging of their foreign exchange exposure.

Providers of protection against big moves in currencies, which can play havoc with budget plans and eat into corporate profits, say business is up. But some say firms that have not yet hedged against FX volatility may have missed the boat.

Major U.S. and European companies, including PepsiCo Inc , U.S. oil company Chevron Corp, UK drinks company Diageo, Swiss agrochemicals company Syngenta and German software firm SAP, have warned that recent foreign exchange volatility may hurt their earnings.

"People are very concerned we don't end up back in Asian crisis territory. So we've seen people hedging that exposure wherever they can," said Nick Bullman, chairman of risk management consultants CheckRisk.

The 1997 Asian crisis triggered a rout in developing economy assets that hurt Western companies exposed to those markets.

Bernard Sinniah, head of corporate FX sales at Citi, said the U.S. bank had seen a 35 percent increase in corporate FX hedging volumes year-to-date, driven mostly by hedging of emerging market currencies.

"Corporates are very focused on short-term hedging. We are not seeing the big three-to-five year hedging, it's all three-to-six months. That means corporates are often not sure where these currencies are going - or even where the relevant economies are going."

The root of the recent price swings has been uncertainty over when the U.S. Federal Reserve will scale back its bond-buying stimulus. The prospect of less central bank cash sparked sharp falls in currencies such as the Indian rupee, the Brazilian real and the Turkish lira, between May and September.

For some, that revived memories of Asia in 1997.

Emerging currencies have stabilised since late September, but renewed debate about the Fed reducing its asset buying could send them tumbling once more.

Meanwhile, the political wrangling over the U.S. budget and debt ceiling has sparked uncertainty over the prospects for U.S. growth, a worry for companies with large dollar revenues.

Data from HiFX, a foreign exchange broker, shows British importers and exporters increased currency transactions by 24 percent in the first half of the year compared with the previous six months, a trend they said continued into the third quarter.

Companies with revenue or outgoings in foreign currencies can protect themselves against adverse currency moves either through the forwards market or by buying options which guarantee that they can buy or sell a currency at a particular rate.

However, many firms have made the mistake of waiting to hedge until markets move, making protection much more expensive.

"Those corporates that put hedges in place when the markets are actually calm tend to benefit from these kinds of moves ... If they haven't put a hedge in place in advance of these moves then they have missed the boat," said Ross Niland, head of corporate FX sales at JPMorgan.

A survey by hedging services company FireApps estimated U.S. businesses lost more than $4 billion in the second quarter due to currency swings.

Ed McGann, global head of currency administration at Bank of New York Mellon, said they had seen a lot more interest this year from U.S.-based companies that operate abroad looking to hedge foreign exchange exposure as an improving U.S. economy causes the dollar to strengthen.

"The dollar's weakness has allowed a number of U.S.-based entities to do well, markets have improved overseas and the repatriation back has been in the U.S. company's favour.

"But clearly as the dollar strengthens against certain currencies it just highlights the impact that currency moves have on performance. People are just waking up."

EMERGING MARKETS

Western companies are increasingly exposed to emerging market currencies. The ratio of German exports, for example, going to those markets rose to 30 percent in 2012 from 23 percent in 2007, according to a Commerzbank research note.

Many firms may be slow to hedge, however. In the past they have typically not hedged, betting instead that emerging currencies were on a one-way track higher.

"We have definitely seen a pick-up in enquiries from emerging markets clients," JPMorgan's Niland said. But he said for most corporate clients this had not resulted in more hedging because companies often do not act until markets move.

FireApps warned in their blog that many companies are focused on the large currencies to which they are most exposed. They advocated managing currency exposure across all currency pairs, because smaller currencies such as the Australian dollar and Indian rupee are more volatile and can carry more risk.

For 2013, the Indian rupee is down around 10 percent, the Brazilian real is down around 6 pct, the South African rand 14 pct and the Turkish lira 10 pct. At one point, the rupee, lira and rand were down 20 percent.

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