* 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 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."
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.