Dealing with Industry-Specific Currency Volatility: A Guide for Cash and Treasury Teams

For companies of all stripes, the year’s ongoing FX volatility has been especially challenging. Still, some industries are more sensitive to market turbulence than others. As part of a new blog series, Natasha Lala, Managing Director at OANDA Solutions for Business examines how corporate treasury teams across different industries are managing their FX exposure.

As we approach the midpoint of 2016, the big story in currency markets continues to be the ever-changing volatility picture. Amid nagging uncertainties about global growth prospects, central bank interventionism, depressed commodity prices, and questionable earnings growth, predicting which way currencies will move is proving to be extremely challenging exercise for even the most seasoned market veterans.

Persistent volatility has had the effect of scaring many away from the world’s largest marketplace, with trading volumes having shrunk more than 20% over the past 18 months. This loss of liquidity has only made markets more volatile, as it becomes more difficult to get in and out of trading positions. Bottom line: volatility in FX looks like it’s here to stay, at least for the foreseeable future.

The situation is challenging enough for traders, but it’s even more of an issue for corporations and their often-overstretched collateral departments. For one thing, corporate treasury specialists — especially at small and mid-size companies — often lack the technologies (e.g. automated FX data feeds) and resources to properly monitor and forecast day-to-day FX rates. This may have been less of an issue in calmer times, but these days an unexpected hit on the FX market can easily eat into a company’s balance sheet.

What’s more, many companies don’t have comprehensive policies in place to deal with sudden volatility in the FX market, and those that do don’t always do a great job of communicating those policies to the junior and mid-level staff who perform the critical, day-to-day cash management duties (analysts, forecasters, accountants, controllers, risk managers etc.)

So how can CFOs, financial controllers and other treasury professionals better equip themselves to navigate the choppy seas of today’s currency market?  Interestingly, the answer may largely depend on the company’s industry.

It is well known that certain types of multinationals are more susceptible to currency risk than others. Companies whose operations rely heavily on cash and other short-term assets are the ones who are most vulnerable to sudden currency movements. Many of these firms are concentrated in industries that produce commodities, basic materials and other physical products. Their supplier, inventory and distribution networks are globally dispersed, subjecting them to currency risk at nearly every stage in the value chain.

Over the next few weeks, we intend to take a closer look at some of the industries that are hardest hit by global FX volatility, from Oil, Gas & Mining to Manufacturing, Technology, Pharmaceuticals, and Travel.  We will also discuss how corporate treasury and finance professionals in these areas can track and prepare for market risk. With FX volatility becoming the new norm, understanding how to manage it is important step in ensuring that your company remains on solid footing in all market conditions.