The US$/Euro exchange rate below 1.20 ! Time to review treasury operations.

US$/Euro rate, from the FT

Since the beginning of 2008, exchange rates have played yo-yo in currency markets.

Just in the first five months of 2010, the US$/Euro has moved from 1.50 to 1.20, a significant drop of 20% for the Euro. That is big enough to take a hit on margins for exporters to Europe.

Since 2008, the C$/US$ moved from 0.95 to a high of 1.30, to recede back to nearly 1.00 earlier this year. Combine the two exchange rates, and you will see that the C$/Euro has moved between a high of 1.70 and a current low of 1.26.

Many treasurers expected the volatility in the currency markets to fold back. We think it is there to stay with us, up and kicking for the next 3-5 years. Here are a couple of reasons for this:
– Interest rate scenarios are still murky, with threats of inflation or disinflation rather unclear.
– Many countries face years of deleveraging. Deficits are expected to be cut down by budget cuts AND export-led growth. It is a recipe that will work for a few, but not for all.
– We can expect political disruptions in some of those countries.
– Fund flows to stock markets and money markets will remain volatile, reflecting changing growth prospects.
– Some of the winners of this financial crisis, notably China, Brazil, India, are planning to aggressively expand overseas. This will eventually come as a shock to many Westerners.

It therefore becomes increasingly important for Canadian companies to spruce up their treasury operations. The period of 2000-2008 was more stable and often one-sided in currency movements. For that reason, skills and competences in currency risks drifted away. Now is the time to review treasury operations:
– Establish a better frame for decision-making in hedging operations
– Get a better reading of market noise and turbulence in currency markets.
– Take better decisions in hedging, at the right time.

André Du Sault.