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Insight to All Things Currency and Treasury Management

Pundits thought that Brexit taught the world to prepare for currency surprises. And they expected the lesson out of Donald Trump’s surprise election on Tuesday would be the same.

Surprise again.

While the British pound fell to a three-decade low after Britain’s vote to leave the European Union, the U.S. dollar rose to an 11-month peak after Trump was declared the next President of the United States. While UK stocks fell 14 percent after the Brexit vote, the U.S. market had a record-breaking week post-election.

There is a lesson to learn here – only one thing is certain in these turbulent times: uncertainty.

But as FiREapps CEO Wolfgang Koester wrote on LinkedIn last week, it’s not for the reason you think. (See Post-Election, Uncertainty Reigns – But Not for the Reason You Think.) Pundits are talking about how Donald Trump’s lack of policy specificity will cause volatility. But actually, volatility is more due to the fact that, like Brexit, Trump’s election defied expectations. The unexpected strength in the U.S. dollar and the stock market reinforced that point well.

So as we look to the Italian referendum on December 4 that could change their constitution, as well as upcoming elections in France, Germany, and elsewhere around the world, let’s not think we can predict the outcome – or even predict the reaction should the outcome be unexpected. Instead, let’s assume the unexpected all around, and prepare for it.

Corporations can prepare, as Koester explained in his post last week. What is the difference between those corporations that will keep their balance sheet impact to less than $.01 EPS and cash flow impact not material relative to net income – and those that won’t? The difference comes down to having the right processes, data, controls, and technology.

Processes

Technology can be used to automate manual processes, but not if the underlying processes are broken. So the first step in getting to the place where the outcome of your currency program is at least ‘Explainable results within risk tolerance’ is cleaning up your processes.

Data

The saying, “garbage in equals garbage out,” is certainly true of data coming out of an ERP and into a trading platform. In multi-currency accounting, the culprit is data integrity issues, most often caused by broken processes. In our experience, we frequently find offsetting errors and omissions that distort foreign currency data, falsely masking the true exposure in ways that make it difficult to isolate an anomaly and determine the source of an error. Finding and resolving such data integrity issues is essential to an effective currency risk management program. (Learn how FiREapps helps.)

Controls

No two companies manage currency risk in exactly the same way. Effective currency risk managers have instituted policies that guide currency risk management practices. Those policies are defined by the Board.

Technology

If the processes are good, the data is accurate and complete, and the controls are in place, then technology can be leveraged to increase the speed and decrease the cost at which accurate and complete exposure data is gathered and analyzed. In the case of FiREapps, our cloud-based solution automates data aggregation, exposure definition, data integrity analytics and exception reporting, providing detailed exposure analytics and various analytics for decision support.

The benefit of preparing for the world to surprise you is that you don’t end up surprised. Hence, FiREapps’ motto: No surprises. As the ancient Greek statesman Pericles put it, “The key is not to predict the future, but to prepare for it.”

How hard is it to get to the place where you’re not surprised by currency volatility impacting your balance sheet or cash flow? Not as hard as you might think. As former Microsoft CFO John Connors puts it, “Companies now must manage currency risk across the full portfolio of currencies to which they’re exposed, which is complex. But that does not mean it has to be difficult or time-consuming. By leveraging a cloud-based exposure analytics tool, you could have the visibility necessary to become a currency-aware organization by your next board meeting.” Talk to one of our team members about doing just that.

Further reading

Currency Crisis Q&A: The Practitioner’s Guide to Navigating the Next Crisis (on-demand webcast)