Insight to All Things Currency and Treasury Management

Today, we are in the midst of what has been called “America’s Brexit moment.” On both sides, each candidate’s supporters have predicted chaos should the other win. But as with Brexit, it is not as much the outcome that is affecting markets but rather the uncertainty. Uncertainty, as Brexit showed us, wreaks havoc in currency markets. And havoc in currency markets, as FiREapps’ recent currency reports have shown, wreaks havoc on the financial statements of companies that don’t have the processes and proper internal controls to mitigate the impact of currency volatility.

As currency volatility impacts corporations, it impacts investors as well. As Reuters reported yesterday, “U.S. banks, including Morgan Stanley, JPMorgan Chase & Co and Goldman Sachs Group Inc, are bracing for potential tumult on financial markets in the wake of Tuesday’s U.S. election…Bank preparations ahead of the U.S. election reflect their experience after Britain’s shock vote to leave the European Union in June, when the S&P 500 fell 3.6 percent the day after the poll.”

U.S. dollar concerns affect global currencies

We’ve written a lot about the “ripple effect” of currency volatility. It’s certainly playing out today, as investors search for “safe” alternatives to the U.S. dollar – including, surprisingly, the Japanese yen. As Reuters reported, “At least for the short term, it is ironically the Japanese yen ¬– the currency of an economy mired in deflation, slow growth, deeply negative interest rates and a falling stock market – that fund managers think is the safest bet in Asia.”

Uncertainty no matter who wins, but there is a solution

Fortunately, corporations can protect themselves – and their investors – even amid unprecedented uncertainty. As we wrote in the aftermath of Britain’s vote, “Brexit was truly an eye-opening moment for many corporates. For those that were prepared, it reinforced the fact that having both the right technology and a solid plan in place could help turn any crisis into an easily navigable event. For those on the lower end of the adoption curve, it served as a very real wakeup call, highlighting the gaps and inefficiencies in many corporate currency programs.”

There are five ways corporate leaders can prepare for the volatility associated with this election, and the next crisis:

  1. Don’t fixate on visible currency
  2. Take advantage of predictive/scenario analysis
  3. Know if your corporate currency policy is up-to-date
  4. Understand where FX is carried throughout the company
  5. Know the effect on those you support

Ultimately, executing on those five strategies is about having the processes and proper internal controls – and supporting technology. Many organizations may need to start to hedge, given they haven’t in the past. But the first step is to get disciplined with processes and proper internal controls.

Want to dive deeper into best practices for dealing with currency volatility? Check out the complimentary webcast – available on demand – Currency Crisis Q&A: The Practitioner’s Guide to Navigating the Next Crisis, hosted by Treasury & Risk.