Treasury Today Country Profiles in association with Citi

Safe haven currencies are risky business for treasury

In a period of rising commodity prices, the strength of the Swiss franc might at first be seen as beneficial to corporates operating in Switzerland. Exporters are suffering, though, and the rapid nature of the currency’s climb has a serious impact on treasury operations.

Over the past twelve months the Swiss franc has appreciated from 0.743 to 0.912 against the euro and from 0.947 to 1.302 against the US dollar. The main factor cited is security – compared with the euro and dollar, each struck by sovereign debt crises, the franc is seen as a ‘safe haven’. Demand for the currency has soared, pushing up its value. That appreciation means that foreign imports bought in Switzerland cost less in terms of francs. On the other hand, Swiss-made goods exported to other countries cost more in terms of the foreign currency, making exporters less competitive.

As a result the Swiss authorities have stepped in to try to protect exporters against a ‘massively overvalued’ currency, cutting interest rates and expanding liquidity. Three-month LIBOR fell to 0.05 on Tuesday, comfortably within the Swiss National Bank’s (SNB) target. Further, speculation has been rife that the SNB may try to peg the franc to the euro. As the graph below shows – the franc weakened slightly as the measures, and the rumours, took effect.

Chart 1: Weekly average exchange rates, January 2011 – August 2011: EUR
Chart 1: Weekly average exchange rates, January 2011 – August 2011: EUR

Source: OANDA

Chart 2: Weekly average exchange rates, January 2011 – August 2011: USD
Chart 2: Weekly average exchange rates, January 2011 – August 2011: USD

Source: OANDA

“We report in USD, so we have not been hit too hard,” says the Treasurer of a Basel-based company, who asked to remain anonymous. “We only have a small manufacturing unit here, but for larger manufacturers, including, of course, the famous watchmakers, this is a really big issue.”

“In some cases they will have been able to mitigate this through their hedging strategies. Still, the scale of the appreciation – and the action taken against it – means they will have to rethink their policies thoroughly.”

The longer-term impact of the strong franc should be considered too, according to the Swiss-based Assistant Treasurer of an American foods company. “The cost of Swiss-based treasury and other central functions has increased significantly,” he told Treasury Today. “The short run impact is limited, but if the franc remains this strong it might have an impact on decisions regarding moving functions or whole businesses to Switzerland.”

“In terms of industry-wide worries right now, any repatriation of funds into franc-functional companies have decreased significantly in value, if they were not hedged,” he continues.

A prime example of that is Nestlé, which found its profits hit by the franc’s appreciation. Measured in ‘constant currencies’, the world’s largest food company reported 7.5% growth in the first six months of this year. In terms of US dollars, profits increased by 30%, but the company’s reporting currency is the Swiss franc – and recent appreciation means reported profits were actually down by 24%. CEO Paul Bulcke says the FX moves,alongside political and economic woes, natural disasters and increasing raw materials costs, “made for an extremely tough, volatile and competitive environment” in which the company, “continued to make good progress.”

The Swiss franc is not the only currency gaining in strength – the Australian dollar, too, has appreciated substantially.

“At a group level, the Australian dollar’s strength has helped us,” says Chris Corner, Treasurer, BBC Worldwide. “For our Lonely Planet business, however, it has presented a challenge – historically it has been primarily Australian dollar cost and foreign currency income. It was already facing a tough time with the downturn in the global travel market and recession.”

“In light of that we have restructured the Lonely Planet business and taken a lot of cost out of Australia by relocating some parts of the business to London and New York.”

Volatility – and the decline of the euro – is set to continue as debt crises are yet to be solved. Expect to see more cash moving to ‘safe haven’ countries, and more companies following BBC Worldwide’s example and cutting costs in those locations.

Even if such major moves are not suitable for your company, a serious review of hedging strategies may well be in order to safeguard against the prolonged period of volatility.