ING’s latest US election guide for the FX markets highlights key currency moves leading up to and after the election. Like loose fiscal, tight monetary and protectionist policies (most likely under Trump) boosting the dollar. European FX will come under broad pressure in the event of universal tariffs and worsening geopolitics, but the low yielding JPY and CHF are more susceptible to higher US rates.
Asia currencies should prepare for any renewed trade protectionism broadening out beyond China to countries like Vietnam. Tariffs could be used as a threat to deliver stronger Asian FX. Chinese authorities, playing the long game, will continue to fight a weaker CNY.
Elsewhere, Latin American currencies could weaken on a Trump presidency. Brazil and Chile’s currencies performed poorly through the last Trump administration, thanks mainly to lacklustre Chinese demand. Other sources of currency volatility ING analysts flag include US debt sustainability. A debt crisis and the threat to the US financial system could, counter-intuitively, send the dollar higher.
Whatever the result of the US election, the likelihood of more frequent, drastic currency movements makes the need for smoother FX operations for businesses more compelling.
“The rising threat of currency movements means it’s vital that corporates optimise their FX set-up and processes to protect their business,” argues Eric Huttman, CEO of MillTechFX. He estimates that nearly 40% of European corporate business activity is exposed to foreign currencies and nearly three quarters of business says their financial results are impacted by volatility.
But it’s not just important to hedge currency risk. Huttman warns that one of the best ways to prepare for FX volatility is to reduce manual processes which drain corporates’ efficiency. Many European corporates still instruct financial transactions over the phone, while nearly a quarter (24%) are still using email. Manual processes mean FX price discovery often involves multiple phone calls, emails or online platforms to log in to just to get comparative quotes from counterparties.
“Because the market is constantly moving, price discovery requires a team of people; calling, emailing and logging in simultaneously before they can collectively decide who offered the best quote.”
Moreover, price discovery is just the first step in a long-winded manual process of booking and settling an FX trade. Finance professionals may have to get approval from different layers of seniority, wait for trade confirmations which usually arrive via email, process settlement, enter payment details and, in some instances, share trade information with third parties such as administrators or regulators.
“All this internal, manual and siloed communication can be extremely inefficient. And this is just for one, single trade. Many organisations execute tens or hundreds of trades every month with different products and mechanics. As a result, corporate treasury teams spend on average 2.25 days per week on FX-related matters, while 16% spend four to five days.”
Huttman notices that more treasury teams are shifting away from traditional FX providers and legacy infrastructure towards automation through new technology platforms. But he says there is still a reliance on manual processes in certain segments of the market, leading to some areas becoming antiquated. Despite new technology being available, many corporates still use old-school methods such as phone and email to transact.
The benefits of automation
For companies, it is operationally inefficient to set up and manage multi-bank relationships, meaning they often rely on a single bank or broker to meet their FX hedging requirements. Automated FX solutions enable firms to compare prices from multiple liquidity providers on a single marketplace. Not only does this bypass phone calls and email exchanges, but it also enables firms to get the best available price and lock it in.
Automation also enables end-to-end workflows. Post-trade execution processes can be fully automated, from settlement to onward payment, regulatory reporting or sharing trade data with third parties.
Digitisation also brings transparency benefits through real-time reporting and FX transaction cost analysis (TCA). TCA can be used to help firms understand how much they are being charged for the execution of their FX transactions, in addition to demonstrating good governance to internal stakeholders.
“Automation can lead to faster onboarding. Rather than spending months (even years) setting up multiple FX facilities with different counterparties, a digital FX marketplace enables firms to begin transacting within weeks,” concludes Huttman.
