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Risk & return: tracking forward points.

The chart displays the dispersion of one-year forward points between 2018 and 2022 in four currency pairs: EUR-USD, EUR-MXN, EUR-CAD and EUR-COP.

Unsurprisingly, interest rate differentials to EUR in emerging markets currencies such as MXN and COP are higher and more volatile than USD or CAD.

In that regard, the Bank of Canada has just decided to keep its policy rate unchanged at 4.5%, as it sees signs of inflation quickly receding towards 3%.

The Canadian central bank welcomes the good news on the inflation front, but adds that “the job is not done”, and that quantitative tightening remains in place.

This prudence goes a long way in explaining CAD’s low forward points dispersion to EUR. See our report “Optimising forward points. How to profit from interest rate differentials between currencies”.

Morgane Chavet on FX management.

We interviewed BNPP’s Morgane Chavet, Forex and Interest Rate Derivatives Sales at BNP Paribas Corporate & Institutional Banking. In preparation for the interview, we conducted a LinkedIn poll about the main benefits of automating the FX workflow.

Focusing on value-adding tasks came well ahead, with 63% of the votes, followed by ‘reducing the cost of hedging’ (19%) and ‘eliminating operational costs’ (11%).

The conversation touches on topics related to the FX workflow automation, and how treasurers use automation to become more strategic. Concluding the conversation, Ms Chavet says:

“Thanks to Kantox’s solutions, we can switch our discussion (with corporate clients) from the topic of P/L risk to a more strategic discussion related to balance sheet risk or intra-group loans”. 

De-dollarization talk: should CFOs listen?

De-dollarisation talk is all the rage, at least in discussions between BRICS countries: China, Russia, Brazil, India and South Africa. There appear to be two different trends at play: 

• A macro-political or ‘top-down’ aspiration by BRICS countries to challenge the dominant position of the U.S. dollar. 
• A microeconomic or ‘bottom-up’ activity by corporate treasurers seeking to use more currencies in day-to-day operations.

While the first argument grabs all the headlines, it is the least important of the two for currency managers. According to the Bank for International Settlements, USD dominance is evident across all FX instruments and counterparties: “At least 85% of trading in the spot, forward and swap markets feature USD in one leg of the transactions”.

Automation & (treasury) jobs.

“Automation removes tasks, not jobs”. This great line was penned by Noah Smith (@noahpinion) in a review of recent studies about the impact of automation —and AI in particular— in terms of the job market.

The fact is, automation often ends up complementing a worker’s effort instead of substituting for it. As Mr Smith puts it: there is “a fundamental difference between automating jobs and automating tasks.”

Technology can replace some tasks, but it can also “make us more productive performing other tasks”. When it comes to corporate FX, that’s not a bad description of what Currency Management Automation does: it’s about removing manually executed, time-consuming, repetitive and error-prone tasks, allowing managers to focus on adding real value for their company. 

Currency management idea of the day: removing ‘silos’.

What if removing ‘silos’ was one of businesses’ top priorities going forward? A recent study by analysts at McKinsey points in that direction. The consultants see US$80 trillion in revenue flowing to the emerging ‘ecosystem economy’ between 2023 and 2030, as silos are forcefully removed. So the issue is: are you actively removing those ‘silos’ when managing currencies?

Breaking down barriers between finance and commercial teams allows for a more efficient currency management process. As an example, with the help of API connectivity, finance teams can provide commercial teams in real-time all the required FX rates, including spot and forward rates with the desired markups per client segment and currency pair.  

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