FX AND REPATRIATION
Managing the New FX Risks
October 30, 2008
Christopher Bjorke

Alarming shifts in many Asian currencies left markets in turmoil and forced governments to take emergency action last week. The South Korean won and the Indian rupee plumbed new lows while the sharp appreciation of the Japanese yen darkened prospects for the country’s big exporters. Currencies have begun to stabilize, but the fluctuations are a reminder of the importance of managing foreign exchange risks.

Wolfgang Koester, CEO of FX management firm FIREapps, discussed the causes of the currency movements and how companies can adapt to the new volatility.

What’s behind the recent dramatic fluctuations in many Asian currencies?

There is obviously a lot of nervousness around unprecedented times for Asian economies. Historically Asian countries have been regarded as more closely tied than they appear to be today. The fact that the economies of these countries are more global and less closely coupled adds to the uncertainty.

Asian countries, more than any other, have been known to try to manage their currencies. Today, with the exception of the Japanese yen, Asian currencies are weakening, but there is still global pressure to follow the U.S. and other G7 countries to cut interest rates.

Combine the decoupling of Asian economies and currencies with the pressure to cut rates and you escalate concerns over uncoordinated intervention by central banks. Lack of coordinated efforts will be seen by speculators as an opportunity to make money by betting against the intervention within days after the intervention has moved the currency in the direction desired by the central bank.

Do you think currencies are seeking new long-term values, or are they likely to return to similar levels following the volatility?

We think we have seen a reversal of the trend of the decline in the U.S. dollar relative to other currencies. We believe that the current level of volatility will be sustained and will not go below where it has been in August. At the same time, we expect that the currency levels of early summer will not been seen again for the next 3-5 years.

How should anyone managing FX approach the coming period of economic uncertainty?

Managing currency exposures has three focal points.

First, one needs to ensure a complete and timely understanding of foreign exchange exposures. Companies struggle with access to the data required to accurately quantify their FX exposures, especially with regard to non-G10 currencies. They also struggle to have the data available within a reasonable time period. Waiting five days or more to act after the end of the month or quarter, considering the current volatility, is deadly and will result in ongoing FX surprises.

Second, one needs to understand the actions to be taken given the risk profile acceptable to the company. There are two types of actions: operational and financial (hedging). Operational actions focus on an understanding of the FX exposures, suggesting internal actions to reduce exposures prior to the second and more expensive action—hedging.

Third, one needs to manage towards a net risk that is acceptable to the company that can be benchmarked and communicated to all constituents. Constituents will continue to try to understand FX impact on corporations and will want to understand the company’s FX exposure, the actions the company is taking to protect corporate value from foreign currency volatility, and the resulting FX risk.

The bottom line question is: “tell us what your real current risk is with respect to currency impacts on your business.”

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