Opportunistic FX managers are locking in favorable exchange rates to hedge exposures as markets gyrate.
NeuGroup members have locked in favorable foreign exchange rates in the wake of volatility sparked by the coronavirus outbreak, plunging oil prices and speculation about more US interest rate cuts by the Federal Reserve.
- “We’re taking advantage; this is something of an opportunity to layer in hedges,” said one risk manager during a NeuGroup’s Virtual FX Summit sponsored by Chatham Financial.
- Amol Dhargalkar, a managing director at Chatham, said, “We are definitely seeing some opportunistic hedging of FX as it has moved to more favorable rates—depending upon the direction of the exposure, of course.”
Yen strengthens. The summit began one day after the Japanese yen soared to a more than three-year high of 101.19 per US dollar on Monday as investors sought safe-haven currencies. It jumped 9.4% in 12 trading days.
- One NeuGroup member whose company has restarted a yen cash-flow hedge program said the FX team locked in rates in the range of 102 to 104. Another member whose company is long the currency said locking in yen was “the main opportunity” for her team amid the volatility.
Winning from weakness. A third participant said the market turmoil allowed his team to layer in hedges for currencies where the company is short, including the Brazilian real, the Canadian dollar and the Mexican peso. The peso fell to a three-year low against the dollar on Monday and the real has plunged about 15% this year.
Not everyone. At least one person at the virtual meeting said her team has not been trading “because spreads are so wide.” For now, traders at this company are “just monitoring” market moves.
Beyond FX: One of the participants said that beyond FX, her company has debt maturing in a little over a year and is exploring options for the best time to refinance in light of the recent plunge in interest rates.
- Mr. Dhargalkar said many companies have already taken advantage of extremely low fixed rates and are not in a position to do more now. “Companies that did nothing are coming back and saying maybe we should do something now,” he said.
- Chatham continues to see more companies adding fixed-rate debt to their capital structures; recently, more of them are doing so synthetically rather than through new issuance.
- Chatham is seeing more companies do pre-issuance hedging of future anticipated financings. “Many investment grade companies are rushing to hedge now for issuances as far out as two years,” Mr. Dhargalkar said.
Strategic opportunities Below are three suggestions listed in Chatham’s presentation on hedging opportunities. Insights will dive into these and other highlights from the Virtual FX Summit in future posts.
- Extend hedges on floating rate debt to take advantage of pricing and lock in a low rate.
- Consider a combination approach of caps and swaps to hedge floating rate debt.
- For hedges maturing in the near future, consider executing forward starting hedges while rates are low.