fx survey 2021 en - credit suisse
TRANSCRIPT
Corporate Banking
FX Survey 2021.Assessment of exchange rate developments.
2
Contents
03 Editorial
04 InterviewwithThomasGottstein,CEOofCreditSuisseGroup06 CreditSuisseFXSurvey2021
12 RosyoutlookforSwissexports
15 CreditSuisseforecasts
18 FXmarket-reflectingon2020
20 Planningandflexibility:Goldenrulesofcurrencyhedging
22 Currencyhedgingstrategiesforeverymarketenvironment
26 InterviewwithDr.AndréaM.Maechler,memberoftheGoverningBoardoftheSwissNationalBank
30 GivaudanSA
32 ThermoplanAG
34 ArrowMetalsandTrading
36 1epensionplans
38 Successfulcurrencymanagement
FX Survey 2021. Assessment of exchange rate developments. 3
Dearreader
Inspringofthisyear,theoutbreakoftheCOVID-19pandemicledtoaglobaleconomicdownturnandtheworldcollectivelyhelditsbreath.Thesummermonthsshowedtheoppositepicture:Sociallifeandconsumptionwereupagain,andtheeconomyletoutasighofrelief.Keytothisrapidrecoverywasthesupplyofliquidityandcapitaltocompanies.However,withtheadventofthesecondwave,therewasalsoanewdownturnineconomicoutput.Atthesametime,geopoliticalriskshaveincreased.
Incombinationwiththeongoinglow-interestrateenvironment,turbulencefromtheseriskshascauseduncertaintyinthepastfewmonths,particularlyontheforeignexchangemarket.ForSwisscompaniesthatdealwithdifferentcurrenciesaspartoftheirbusinessactivities,hedgingcurrencyrisksismoreimportantthanever.Onlythencanlong-termplanningtakeplace,eveninavolatileenvironment.AsubstantialproportionofSwisscompaniesalreadyrelyontargetedcurrencyhedging.Inthiscontext,thefocusismainlyontheeuro,followedbytheUSdollarasthesecond-mostimportantforeigncurrencyforourcorporateclients.TheeurozoneremainsthemostimportanttradingpartnerforSwisscompanies.Thisisconfirmedbytheresultsofoursurveyforthisyearregardingtheexpectationsforeconomicandexchangeratedevelopmentsin2021.
However,thecoronaviruspandemichascertainlytaughtusonething:Unusualsituationsrequireahighdegreeofflexibility.Thisdoesn’tjustapplytothehedgingofcurrencyrisks.Thosecompaniesthatwereabletorapidlyadjusttheirbusinessmodelstothenewenviron-mentwerethusabletobenefit.Beinginnovativeandflexible–thatalsoappliestousasabank.WithourmySolutionsplatform,weoffercompaniestheoptionofconductingforeignexchangebusinessonline.Anddespiteincreasingdigitalization,personaladviceremainsimportant.WithourcurrencycentersinBasel,Geneva,Lugano,St.Gallen,andZurich,weremainregionallypresent.Thankstoourworldwidenetworkofspecialists,wecancovereveryneedinthefieldofforeignexchangetrading–fromasimplecurrencyexchangetothecomplexhedgingofstrategictransactions.
Despitethestrains,thankstoahighdegreeofdiversificationandinnovativeentrepreneur-ship,theSwisseconomyhasonceagainproveditselfrobustin2020.Wearenowaskingourselves:Whatwillhappeninthenewyear?ReadtheassessmentsofSwisscompaniesandexpertsonthistopic.FindoutwhichstrategiesarelikelytoprovethemselvesinwhichmarketenvironmentandgaininsightintothehedgingstrategiesofSwisscompaniesthroughexcitingclientinterviews.
Wehopetoprovideyouwithinterestinginsightandinspirationforyourbusinessactivitiesandwishyouapleasantread.
AndreasGerberHeadofCorporateBanking
Visitusontheinternetatcredit-suisse.com/fx.
Editorial
4
Interview with Thomas Gottstein, CEO of Credit Suisse Group
Mr. Gottstein, you’ve been Global CEO of Credit Suisse since February 2020. How have you found your first year or so in the role?Ithasbeen–andremains–achallengingtimeforCredit Suisse,ouremployees,andourclients.Healthisournumberonepriority.SupportingtheSwisseconomy–inparticularbyprovidingcompanieswithliquidityandcapi-tal–islikewisevitalduringthisperiod.Atthesametime,asabankweneedtobeabletooperateprofitablyin thischallengingenvironmentandhavehighlevelsofliquidityandcapitalization.Despitethecrisis,wewereabletomakeanumberofimportantdecisionsforourbank.At a globallevel,wecreatedanewstructureforInvestmentBanking;wealsobroughttheriskandcompliancefunctionstogetherinasingleunit.InSwitzerland,wedecidedtofullyintegrateNeueAargauerBank,andindigitalbankingwemadehugestrideswiththelaunchofourinnovativeCSXoffering.Althoughthesituationremainschallenging,Credit Suisseisverywellpositioned–so,I’m pleasedtobeabletolookbackonaveryintensiveand rewardingtime.
How has the economy fared since the outbreak of the COVID-19 crisis, and how are things looking at the moment?Allregionsoftheworldtookamajoreconomichitinthespringof2020.Lifetemporarilyslowedalmostevery-where,andpartsoftheeconomysufferedgreatlyfromtherestrictionsonpubliclife.AlthoughmanycountriesandregionsexperiencedaV-shapedeconomicrecoveryoverthesummer,theslopeoftheVwasverylopsidedinalotofinstances.Thatmeanstheeconomywillbeslowtorecoverinthoseplaces,giventhefreshwaveofCOVID-19andassociatedlockdownmeasures.Economicoutputhasnowstartedtofallagaininsomecountries,particularlyinEurope.Bycontrast,thesituationinAsia–andespeciallyChina–looksmuchmorestable.TheSwisseconomyseemstobecopingwelldespitebeingbadlyaffectedbythesecondwave.ThisispartlydowntotheresilienceofSwisscompanies,butthesupportmeasuresimplementedatanearlystagehavealsoplayedasignificantrole.
In its FX Survey, now published for the fifth time, Credit Suisse looks at the expectations and challeng-es facing Swiss companies. What advice would you give companies with regard to foreign exchange risks?Geopoliticalriskshaveincreasedinrecentyears.That’swhywe’realsoseeingagreaterdegreeofnervousnessanduncertaintyinglobalforeignexchangetrading.Pricefluctuationsoftenarriveunexpectedlyintheforeignexchangemarket,andcanbesevere.Toavoiduncertainty,entrepreneursneedtoengageinforwardplanning,andthatincludestheFXsideofthings.Thehedgingofforeignexchangerisksincreasesplanningcertaintyandhelpscompaniesfocusontheircorebusiness.
The Swiss economy has overcome many crises in the past, and even in the current environment we’re already seeing a return to more optimistic develop-ments in the domestic market. What, in your view, are the reasons for the high degree of resilience shown by Swiss companies?It’struethatSwisscompanieshaveyetagainproventheirabilitytoweathercrises.However,regardlessoftheresilienceshownbycompanies,somesectorshavebeenimpactedmuchmoreseverelythanothers.Ingeneral,it’s impressivetoseehowquicklytheprocessofadjustingtodifficultconditionshasoccurredinmanyareas.Itsaysa lotaboutSwitzerland’sdurabilityasabusinesslocation.FrameworkconditionsareverygoodinSwitzerland,andweneedtoensurethatthisremainsthecase.Ourentre-preneursareinnovativeandtenacious–lookathowwelltheycopedoverallwiththeSwissfrancshockandthefinancialcrisis,forexample.
Optimistic developments in the domestic market
FX Survey 2021. Assessment of exchange rate developments. 5
Lastly, on a personal note: What associations do foreign currencies have for Thomas Gottstein the person?Ipersonallyassociateforeigncurrencieswithvacationand travel–justlikemanypeople,nodoubt.Thatsaid,the pastmonthshavehighlightedthefragilityofworldwidenetworks,globalization,andinternationaltravel.InSwitzer-
land,weareprivilegedtoliveinacountrythat’ssobeautifulanddiverse–bothintermsofsceneryandculture.Ourpoliticalstabilityandpersistentlylowratesof unemploymentcomparedwithothercountriesareequal-lypositiveaspects.NorshouldweforgettheSwissfranc–stilloneoftheworld’smostimportantcurrenciesanda “safehaven.”
6
Credit Suisse FX survey 2021
Hedging ratios no higher despite coronavirus pandemic
1,088 respondentsInmanyrespects,2020wasarollercoasterride.Thecoronaviruspandemicposedmajorchallenges,especiallyforcompanies,andcalledforahighdegreeofflexibilityin theseuncertaintimes.So,thefactthatover1,000companiestookpartinourannualFXsurveyfor2020appearstobecauseforcelebration.Nearlyone-quarterof themdidbusinesswithimports,andanotherquarterwereinvolvedinexports.Anadditional40%orsodoboth,andtheremain-ingnumber,justover10%,focustheirbusinessactivitiesonSwitzerland.Inotherwords,thevastmajorityofsurveyrespondentsdobusinessinternationally.
Euro clearly the most important foreign currency, followed by the US dollarAcloserexaminationofthefrequencyatwhichpurchaseandsalestransactionsareconductedindifferentcurrenciesrevealsthattheeurozoneisthemaintradingpartner.Over80%ofsurveyrespondentsmadeatleastsomeoftheirpurchasesineuros(EUR).ThatmadetheeuroevenmoreimportantforsourcingthantheSwissfranc(71%).Onthesalesside,however,thelattermaintainedtheupperhand,with70%ofrespondentsbillingatleastaportionoftheirsalesinSwissfrancs(CHF).Over60%issuedinvoicesineuros.ThesecondmostimportantforeigncurrencywastheUSdollar(USD),usedby45%ofrespondentsforpurchas-esand36%ofrespondentsforsales.Othercurrencies,suchastheBritishpoundsterling(GBP),playedaminorrolebycomparison.
Companies not expecting the euro to appreciateTheextremeuncertaintywasalsoseeninthereportedcurrencyforecastsofthecompaniessurveyed.Whenthesurveywasconductedinthefallof2020,thepredictionsfortheEURissuedbytherespondentsexhibitedawiderrangethaninanyotherforexsurveyconducteduntilthen.ThespecificforecastsfortheEUR/CHFexchangerateextendedfrombelow0.85to1.20.However,nearly80%ofrespondentsexpectedtheratetobebetween1.05and1.10asoftheendof2021.
Widely scattered predictions for USD, but more con-sensus on sterlingResponsesconcerningtheUSDwerealsomoremixedthaneverbefore.Roughly45%ofthecompaniessurveyedpredictedarateof0.90to0.94.Anotherapproximately40%sawtheUSDhitting0.95to1.00bytheendof2021.Bycontrast,thereseemedtobealittlemoreagreementconcerningtheBritishpound(GBP)thaninprevioussurveys.ThedifferencesbetweentheGBPforecastswerethewidestshortlyafterthevoteonBrexitinJune2016,buttheygrad-uallynarrowedagainintheyearsthatfollowed.Atalmost60%,mostrespondentsexpecta GBP/CHFexchangeratebetween1.15and1.20 bythe endof2021.
44% expect economic growthWhenitcomestotheSwisseconomyasawhole,opin-ionsofthecompaniessurveyedalsodifferedmorewidelythanwasthecaseinpreviousyears.Though44%expecteconomicactivitytogrowin2021,30%areanticipatingarecession.Theremainingrespondents(approximately25%)assumedthateconomicoutputwouldremainstablein 2021.
Participants believe the SNB’s key interest rate could still be around -0.75% at the end of 2021Ontheissueofmonetarypolicy,therewaswidespreadagreement.Nearly90%predictedthekeyinterestrateof-0.75%setbytheSwissNationalBank(SNB)wouldnotchangeasoftheendof2021.Only6%ofrespondentsfeltitwaslikelytheratewouldbeloweredintodeepernegativeterritory.Evenfewer–namely4%–expectedtheSNBtoraiseitskeyinterestrate.
Currency hedging in uncertain times Consideringthehighlevelofmacroeconomicuncertaintyandthewiderange,ordivergence,ofestimatesconcerningthedevelopmentofexchangeratesfortheEURandUSD,companieswouldbewelladvisedtohedgeatleastsomeoftheircurrencyrisks.Thatisbecausethisyear’ssurveyhasrevealedthat,firstandforemost,theEURandtheUSDareveryimportantbothforpurchasinginputsandwhensellingproductsorservices.Byhedgingtheircurrencyrisks,companiescaneffectivelysafeguardagainstexchangeratefluctuations,therebyestablishingamorereliablebasisfor planning.
FX Survey 2021. Assessment of exchange rate developments. 7
Participants estimate EUR/CHF rate of 1.07 at end of 2021Respondentsexpected,onaver-age,aEUR/CHFexchangerateof1.07asoftheendof2021.In oth-erwords,theyanticipateafurtherslightdevaluationoftheEURversustheCHF.CreditSuisseanalysts,bycontrast,predictaslightapprecia-tionoftheeuro,forecastingaEUR/CHFexchangerateof1.10bytheendof2021.Forthepastfouryears,surveyparticipantshavebeenmorepessimisticabouttheEURthanCreditSuissehasbeen.Thatexpec-tationprovedtobecorrectinthepastthreeofthoseyears.However,thedif-ferencebetweentheCSforecastandthesurveyresultswasrelativelysmallfor2021.
Respondents expect lower euro exchange rate than Credit SuisseExchangerateforecastsandactualexchangeratesforthecorrespondingyear-end(Decemberaverages)
Companies believe the USD will recover somewhat Exchangerateforecastsandactualexchangeratesforthecorrespondingyear-end(Decemberaverages)
Survey participants forecast an ex-change rate of 0.93 for the dollarThecompaniessurveyedbelievetheweaknessofthedollaroughttofadea littlebytheendof2021.Accord-ingly,respondentspredictedaUSD/CHFexchangerateof0.93.ThatputsthemclearlyabovetheestimatesofCreditSuisse,whereanexchangerateof0.88isanticipatedbytheendof2021.WhiletheforecastsmadebyclientsandCreditSuisseFXstrate-gistsinrecentyearswerequiteclosetooneanother,thedivergencewithrespectto2021is relativelysignificant.
Sources: Credit Suisse FX surveys for 2017–2021, Credit Suisse
0.95
1.00
1.05
1.10
1.15
1.20
1.25
2017
2018
2019
2020
2021
EUR/CHF
Credit Suisse (forecast) Clients (forecast) Actual exchange rate
0.90
0.85
0.95
1.00
1.05
2017
2018
2019
2020
2021
USD/CHF
Sources: Credit Suisse FX surveys for 2017–2021, Credit Suisse
Credit Suisse (forecast) Clients (forecast) Actual exchange rate
8
Credit Suisse FX survey 2021
Respondents forecast a GBP/CHF rate of 1.18ThesituationwiththeBritishpoundsterlingisexactlytheopposite.As mentionedabove,therewasmoreconsensusfor2021whenitcomestoGBPforecastsbetweenthesurveyedparticipantsthaninpastsurveys.The predictionsmadebyrespondentsandCreditSuisseregarding2021matchoneanothermoreclosely.The companiessurveyedanticipateonaverageaGBP/CHFexchangerateof1.18attheendof2021.AnalystsatCreditSuisseexpectarateof1.19.Inthepastfouryears,themorepessi-misticviewheldbysurveyparticipantsconcerningthepoundsterlingversustheSwissfranchaspaidoff.
Increased certainty concerning Brexit reflected in forecastsExchangerateforecastsandactualexchangeratesforthecorrespondingyear-end(Decemberaverages)
82% of respondents buy in EUR “Inwhichcurrenciesdoyousourceyourproductsorservices(inpercent)?”;shareofcompanies
Euro is the number one purchasing currencyForeigncurrenciesplayedanim-portantroleinprocuringgoodsandservicesfromotherbusinesses.TheEURemergedasthekeycurrencyforprocurement,with82%ofsurveypar-ticipantsbuyinginputsinEUR.For allcompaniessourcingproductsandservicesintheeurozone,anaverageof46%ofallpurchasesweremadein EUR.ThepercentagewasroughlythesamefortheCHF,underscoringoncemoretheimportanceoftheEURforprocurement.
1.10
1.00
1.20
1.30
1.40
1.50
2017
2018
2019
2020
2021
GBP/CHF
Sources: Credit Suisse FX surveys for 2017–2021, Credit Suisse
Credit Suisse (forecast) Clients (forecast) Actual exchange rate
87%
26%
15%
51%
89%
93%
8%
71%
82%
45%
6%
2%
47%
46%
36%
16%
19%
24%
0% 20% 40% 60% 80% 100%
Other
CHF
EUR
JPY
GBP
USD
Currency used for sourcingCurrency not used for sourcing
Don't know or N/AAverage share of currency for sourcing
Sources: Credit Suisse FX survey 2021
FX Survey 2021. Assessment of exchange rate developments. 9
CHF remains chief currency for selling“Inwhichcurrenciesdoyousellyourproductsorservices(inpercent)?”;shareofcompanies
40% hedged part of their foreign exchange risks“Doyouhedgeyourforeignexchangerisks?Ifso,whatisyourhedgingratio?”;responsesfromcompanies
EUR and USD also not to be underestimated in salesThecurrencymostfrequentlyusedinsalesbillingistheCHF.Atthetimeofthesurvey,70%ofcompanieshadcustomerswhopaidinCHF.However,theroleofforeigncurrenciesinsellinggoodsandservicesshouldnotbeunderestimated.Oftherespondents,62%and36%indicatedthattheyalsomadefrequentsalesinEURandUSD,respectively.Theaveragesharesoftotalsalesthattheythenreceivedisrelativelyhigh,at42%and38%.
60% of foreign exchange risk was hedgedOfthecompaniessurveyed,40%indicatedthattheyhedgetheirforeignexchangerisks.Onaverage,theper-centageofcompaniesthatperformedhedgingwasroughly60%.Thesurveyalsoshowedthatcompaniesusinghigherproportionsofforeigncurren-ciesinsourcingmoreoftentendedtohedgetheirforeignexchangerisks.Therewasasimilartrendnoticeableintheareaofsales.
88%
27%
35%
59%
88%
93%
7%
70%
62%
36%
7%
3%
65%
42%
38%
14%
18%
23%
0% 20% 40% 60% 80% 100%
Other
CHF
EUR
JPY
GBP
USD
Currency used for salesCurrency not used for sales
Don't know or N/AAverage share of currency for sales
Sources: Credit Suisse FX survey 2021
Currency hedging ratio60%
Currency hedging: No60%
Currency hedging: Yes40% Percentage
not hedged 40%
Source: Credit Suisse FX survey 2021
10
Credit Suisse FX survey 2021
Despite appreciation of CHF, only 35% of exporters engaged in hedgingAmongimportcompanies,47%hedgedtheirforeignexchangerisks.Thatmeansthissectorhadthehighestpercentageofcompaniesthatperformhedging.Thehedgingratiodeterminedfortheexportsectorwasparticularlynotable.First,only35%ofexportenterpriseshedgedtheircurrencyrisks.Second,theaverageof56%thatdidhedgewasalittlelowerthaninothersectors,wherethepercentageofbusinessesthathedgedtheirtransactionswasroughly60%.
Import companies hedged most frequently“Doyouhedgeyourforeignexchangerisks?Ifso,whatisyourhedgingratio?”;responsesfromcompaniesbyforeigntradeactivity
Coronavirus pandemic did not result in higher hedging ratio “Haveyouincreasedyourhedgingratiosincetheoutbreakofthecoronavirus?”;responsesfromcompaniesthathedgetheirforeignexchangerisks
Flexibility is important during the coronavirus pandemicThemajorityofrespondentshavenotincreasedtheirhedgingratiossincetheoutbreakofthecoronaviruspandemic.Uncertaintysurroundingfuturecashflowsandgreaterflexibilityseemtohaveplayedamajorroleinthatdecision.However,53%appeartohavehaddifferentreasons.Someofthosecompanieswereprobablyalreadyhedging100%oftheirforeignexchangerisk,thusexcludingthepossibilityofincreasingtheirratio.
61%
61%
60%
56%
38%
40%
47%
35%
0% 20% 40% 60%
In Switzerland only
Both
Import
Export Percentagethat hedge
Percentagehedged
Source: Credit Suisse FX survey 2021
0% 10% 20% 30% 40% 60%50%
Source: Credit Suisse FX survey 2021
No, for other reasons 53%
Yes, due to greater uncertainty surroundingCOVID-19 2%
Yes, for other reasons 3%
Yes, because of currency fluctuationsor appreciation of the Swiss franc
6%
No, because of the increased uncertaintyin future cash flows
14%
No, in order to remain flexible and benefitfrom increased volatility
22%
FX Survey 2021. Assessment of exchange rate developments. 11
Many factors influence hedging ratios“Whatfactorscontributetohowyoudetermineyourhedgingratio?”;(multipleanswerspossible),shareofcompaniesthatusehedging
Import/export sector sees trend toward shrinking FX cash holdings“Haveyouchangedtheamountofforeigncurrenciesyouholdincashsincetheoutbreakofthecoronavirus?”;responsesfromcompaniesbyforeigntradeactivity
Exchange rates most frequently cited as deciding factorExchangeratevolatilityplayedaroleforroughlyone-fifthofthesurveyedcompaniesthathedgedtheirforeignexchangerisk.Ingeneral,however,therewereanumberoffactorsthatseemedevenmoreimportantwhendeterminingthehedgingratio.Com-paniesmostfrequentlybasedtheirdecisionsontheactualexchangeratelevel.Nevertheless,internalhedgingguidelines,deviationsintheexchangeratefromthebudgetedrate,andpersonalassessmentoftheexchangeratealsoplayedasignificantrole.
No adjustments to FX cash holdingsCompaniesshowedrestraintwhenchangingtheirforeigncurrencycashholdings.Oftherespondents,72%didnotmakeanychanges.Intheexportsector,thepercentagewasalittlelower,at65%.Whileinternationalcompaniesexperiencedareductionintheirholdingsofforeigncurrenciesincashsomewhatmorefrequentlythananincrease,thesituationwasexactlytheoppositeforcompaniesthatcon-centratedonbusinessinSwitzerland.
Actual exchange rate level: 42%
Internal hedgingguidelines:40%
Actual exchangerate versus predetermined,budgeted rate: 38%
Your assessment ofthe exchange rate:35%
Exchange ratevolatility: 26%
Political environ-mentnationallyand inter-nationally:17%
Amount ofoperatingmargin:16%
Cost of hedgingand interestrate spread:14%
Central banks' monetary policies: 9%
Source: Credit Suisse FX survey 2021
12%
12%
17%
13%
73%
81%
72%
65%
72%
8%
8%
17%
18%
15%
19%
0% 20% 40% 60% 80% 100%
Total
Export
In Switzerlandonly
Both
Import
No change Increase Reduction
Source: Credit Suisse FX survey 2021
12
Rosy outlook for Swiss exports
Burkhard Varnholt, CIO of Credit Suisse (Switzerland) Ltd.
Followingthe2020recession,ourmostimportantexportmarkets(EU,China,andtheUS)willlikelyseeabove-aver-agegrowthin2021.Thisisindicatedbythepent-upconsumerdemandfrom2020,thefiscalstimulus,andmanycorporaterestructuringplans.Theexpectationthatsocietyandtheeconomywillfindwaystolivewiththevirusalsopointstothis.TheeconomicandepidemiologicalrecoveryofNorthAsiaisapositivesignalfortherestoftheworld.ThisisparticularlyimportantfortheSwisseconomy,becauseSwissproductsareespeciallypopularinChina,wherethegrowingdemandfortheseproductsalreadysignalstheeconomicrecoveryoftheregion.Thisappliestopharmaceuticalproducts,foodproducts,watchesandluxurygoods,aswellastoSwissfinancialservices.Germany,ourmaintradepartnerinEurope,andtheUSarealsolikelytoovercometherecessionin2021.Inshort,exportprospectsforSwisscompaniesallovertheworldarelikelytogrowagainin2021.
Swiss franc remains strongNextyear,theexportbusinesswillalsobefacedwiththeSwissfrancasoneofthestrongestcurrenciesintheworld.TheUSdollarseemstohavepasseditspeakandisweakening.ThiscouldleadtotheappreciationofgoldbeingsomewhatconcealedfromSwissinvestors.Theeurocanalsonolongershowanypositiverealinterestrates,withtheexceptionofafewforeigninvestmentsandtheworld’slargestcurrentaccountsurplus.Thebigwinnersof 2021willthereforelikelybeNorthAsiancurrencies.
Theydistinguishthemselveswithallfourcharacteristicfeaturesofstrongcurrencies:ȷ Lastingcurrentaccountsurplus
ȷ Highestrealinterestratescomparedinternationally
ȷ Risingproductivity
ȷ Increasinginvestmentfromabroad.
Inthiscontext,investmentsarecominglessfromtheWestandmuchmorefromotherAsiancountries.AllsignspointtoNorthAsiabeingaheadofthecurvenextyear.
Challenges lead to agilityTherecoveryoftheworldeconomywillmainlyhaveapositiveimpactonSwissSMEsthathaveestablishedthemselvesinattractiveand,insomecases,globalmarketniches.Thestrongfranc,thehighSwisscoststructures,andtheintensepricecompetitionwillensurethatsmallandmedium-sizedenterprisesdisplaytheirtraditionallyhighlevelofagility.Afterall,incontrasttoforeigncompanies,thesechallengesforceSwissSMEstoannuallyoptimizetheirvaluechains.Togetherwiththesectorstructure,competitivenessdrivestherecoveryoftheSwisseconomy.Additionally,theflexiblelabormarket,shortcommutes,goodeducationstandards,andthehighqualityoflifealsocontributetoSwitzerland’scontinuedsignificantpopularityamongtalentsandcompanies.
FX Survey 2021. Assessment of exchange rate developments. 13
14
FX Survey 2021. Assessment of exchange rate developments. 15
USAIntheUS,thedecreaseineconomicmomentumlastyearwaslesssignificantthaninEurope.Duetothemoremoderatedecrease,inturn,therecoverytherethisyearwilllikelybelesssignificantthanonoursideoftheAtlantic.Intheabsenceofashort-timeworksystem,theUSunem-ploymentrateisdirectlycoupledwitheconomicchanges,andunemploymentsupportalsodependsheavilyonthepoliticalsituation.Uncertaintyisaccordinglyhigh.Incontrast,theUScentralbank,theFederalReserve,willalsocontinuetosupplythemarketswithampleUSDliquidityandwilllikelynotturntheinterestratescrew.
EuropeEconomicmomentumislikelytobeverysubduedthiswinter;afterall,thepandemicisnowherenearbeingundercontrol.Thereafter,thevaccinationcampaignswilllikelybecomebroader,enablingagradualeasingofgovernmentandself-imposedrestrictionsthatwillbereflectedinincreasedmobilityandeconomicmomentum,especiallyinthespring.Inthiscontext,therecoveryin2021willbestrongestinthosecountriesthatsufferedmostin2020.Giventheextremelylowinflation,theEuropeanCentralBank(ECB)willmaintainitslowinterestratesuntilfurthernotice.
Massive ups and downs in the unemployment rate USunemploymentrate,seasonallyadjustedin%
Europe has suffered greatly under the coronavirus pandemicChangeinrealeconomicoutputbetweenthethirdquarterof2019andthethirdquarterof2020in%
Credit Suisse forecasts
Sources: Datastream,CreditSuisse Sources:St.LouisFederalReserve,CreditSuisse
–6.0
–4.0
-2.0
0.0
2.0
4.0
China Switzerland Sweden US Germany ItalyFrance
0.0
2.0
4.0
6.0
10.0
8.0
12.0
14.0
16.0
01/2000 01/2003 01/2006 01/2009 01/2012 01/2015 01/2018
16
World trade nearly at pre-crisis levels as of the end of SeptemberWorldtradevolumeindex,seasonallyadjusted,2010=100
Pharmaceutical industry as a growth pillarPharmaceuticalexportsinCHFmnbycountry,seasonallyadjusted,andpercentageoftotalexports
ChinaItseemsthatChina,likemanyotherAsiancountries,hashadthepandemiclargelyundercontrolsincemid-2020.Withaglobaleconomicoutputshareof30%,Asiaisnowkeytodevelopmentsinglobaltrade.China’srobustnessisthereforepartlyresponsiblefortherapidrecoveryoftheglobaltradevolume.Giventhesolideconomicdevelopment,theChinesegovernmentandcentralbankarelikelytoholdbackwithadditionaleconomicstimulusmeasures.Thedesiretobasethegrowthonamoresustainablefooting,however,willlikelypersistandplacelimitsonthepaceofgrowth.
Switzerland Switzerlandhasbeenhithardbythepandemic;however,theeconomicdownturnwascomparativelylessthanincomparableforeigncountries.Thisis,first,duetothehighshareofthepharmaceuticalindustry,whichattimesmadeupalmosthalfoftheentireexportvolume.Second,themeasurestocombatthespreadofthevirusweregenerallylessstrictthanabroad.Third,themeasuresforsupportingtheeconomywereextremelyquickandtargeted.However,similartotherestofEurope,thereturntoasustainablegrowthtrackwillonlyberealisticinthespring.
Credit Suisse forecasts
Source:CPBWorldTradeMonitor.Last data point:September2020 Sources:FederalCustomsAdministration,CreditSuisse
90
95
100
105
115
110
120
125
130
2010 2012 2014 2016 2018 2020
0%
10%
20%
30%
40%
50%
60%
0
2,000
4,000
6,000
8,000
10,000
12,000
Dec.2019
Jan.2020
Feb.2020
Mar.2020
Apr.2020
May2020
Jun.2020
Jul.2020
Aug.2020
Sep.2020
Oct.2020
OthersUS
GermanyItaly
ChinaPharma share
FX Survey 2021. Assessment of exchange rate developments. 17
EUR/CHF exchange rateDuringthefirstwaveofthepandemic,theCHFwasunderupwardpressureagainsttheEUR.However,theSwissNationalBank(SNB)couldatleastlimittheappreciationthroughtargetedinterventions.Sincethen,theCHFhastendedtolosestrengthandtheSNBisinterveningmuchless.PositivenewsoncoronavirusvaccinesoragreementsinEuropehavereducedthedemandfor“safehaven”currenciessuchastheCHF.
USD/CHF exchange rateDespitetheappreciationoftheUSDduringthespreadofthepandemic,weexpectthattheUSDwilldepreciateagaininthemediumterm.TheinterestratecutsbytheUScentralbank(FederalReserve)inthefirsthalfof2020havereducedtheinterestrateadvantageoftheUSDagainstothercurrencies.Additionally,thenegativeperfor-manceandfiscalbalancesheetoftheUSAcarrylong-termrisksfortheUSD.Wethereforeanticipatethat,inthecomingmonths,theUSDwilldepreciateagainstmanycurrencies,suchastheEURandtheCHF.
SNB intervened massively during the first half of 2020InCHF(millions)
Dollar will likely depreciateUSdollarindex(changesagainstmaincurrencies)Jan.1,2017=100
Sources:Bloomberg,CreditSuisse Sources: Datastream,CreditSuisse
75
80
85
90
100
95
105
01/01/2017 01/01/2018 01/01/2019 01/01/2020
–4,000
–2,000
0
2,000
4,000
6,000
10,000
12,000
14,000
16,000
8,000
02/2018 08/2018 02/2019 08/2019 08/202002/2020
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A turbulent year Dr. Günter Grimm Foreign exchange strategist, Credit Suisse AG
FX market - reflecting on 2020
Theforeignexchangemarketexperiencedahighlyeventful2020.TheeventswerelargelydrivenbytheCOVID-19pandemicanditsimpactonmonetaryandfiscalpoliciesintheaffectedcountries.OthernewsincludedthenegotiationsbetweentheEuropeanUnion(EU)andtheUnitedKingdom(UK)onthefuturerelationshipbetweenthetwotradingblocsaswellastheUSpresidentialelections.
TheSwissfrancclimbed4.7%inthefirstquarterof2020basedonthetrade-weightedcurrencyindexoftheSwissNationalBank(SNB).ThedecisionbytheUStoputSwitzerlandbackonthewatchlistofcountriesthatallegedlymanipulatetheircurrencywas,inouropinion,thecauseofthegeneralstrengthoftheSwissfranc.InlateDecember2019andearlyJanuary2020,thefirstcasesofCOVID-19werereportedinWuhan,China,accordingtotheWorldHealthOrganization(WHO).TheCOVID-19crisisescalatedinlateFebruaryasthevirusspreadnotonlyinChinabutalsoaroundtheworld.Thedeterioratingglobaleconomicoutlookheightenedanalysts’expectationsthattheEuropeanCentralBank(ECB)wouldlowerinterestrates,hurtingtheEUR/CHFrate.TheECBliveduptothoseexpectationsbyannouncinganextensivepackageofmonetarypolicymeasuresonMarch12andexpandingitonApril30.TheUSFederalReservelikewiserespondedtotheCOVID-19pandemicwithaggressiveratecutsandfurthermeasuresaimedateasingmonetarypolicy.OnMarch15and20,theSNBannounceditsparticipationinacoordinatedactiontostrengthenthesupplyofliquidityviatheexistingUSdollarswapline.InitsmonetarypolicyassessmentonMarch19,theSNBannouncedthatitwasinterveningmoreintheforeignexchangemarkettohelpstabilizethesituation.In theUS,theS&P500equityindexfell20%,hittingitslowestpointonMarch23.Cyclicalcurrencies,liketheAustraliandollarandCanadiandollar,cameunderpressureagainsttheSwissfrancasaresultoftheweaknessonthecommoditymarkets.ThepoundfellsignificantlyamidtheuncertaintyabouttheoutcomeoftheBrexitnegotiations.ThestrengthoftheSwissfrancpromptedtheSNBtointerveneintheforeignexchangemarkettothetuneofCHF38.5billioninthefirstquarter.
InQ2,theappreciationoftheSwissfranconatrade-weightedbasisreacheditshighestpointthusfar.However,theSNBalsointervenedintheforeignexchangemarketduringthatperiod,purchasingforeigncurrencieswithanequivalentvalueofCHF51.5billion.ThemaineventwasthepresentationofaroadmaponApril21forrecoveryintheeurozone.ThepresentationestablishedtheprinciplesforovercomingtheCOVID-19pandemicandsettinguparecoveryfund.OnMay18,FrenchPresidentEmmanuelMacronandGermanChancellorAngelaMerkelthenintroducedajointproposalonaEuropeanrecoveryplan,whichwasreceivedpositivelybythemarkets.Theideaofsharedliabilityfornewlyborrowedfundsinparticularincreasedtrustintheeurozone’scohesion.InJune,theECBexpandeditsPandemicEmergencyPurchaseProgram(PEPP),rolledoutinMarch,byEUR600billion.TheeasingofCOVID-19restrictionsledtoimprovementintheecono-my.ThepurchasingmanagersentimentindicatorsinEuropebottomedoutinApril.IntheUS,labormarketfiguresforJunewereconsiderablybetterthanexpected,whichcameasasurprise.However,theFederalReservetookaverycautioustoneregardingfurthereconomicdevelopments.InSwitzerland,theSNBleftitspolicyrateunchangedat-0.75%.Itspresident,ThomasJordan,emphasizedthatexpansionarymonetarypolicycontinuedtobenecessarytoensureappropriatemonetaryconditionsinSwitzerland.Headdedthat,astheSwissfrancisstillhighlyvalued,theSNBremainedwillingtointervenemorestronglyintheforeignexchangemarket.Theexpansionarymeasuresonaglobalscaleandtheimprovedeconomicdataledtofurtherrecoveryonequityandcommoditymarkets,whichhadalreadybeguntowardstheendofthepreviousquarter.ThemovebenefitedcyclicalcurrenciesagainsttheSwissfrancinparticular.Forexample,theAUD/CHFexchangeratemadeupnearlyallitslossesfromthepreviousquarter.TheEUR/CHFratestabilized,andtheUSD/CHFfell,whileGBP/CHFcontinuedtosufferfromtheeffectsoftheongoingBrexitnegotiations.
FX Survey 2021. Assessment of exchange rate developments. 19
InQ3,thetrade-weightedSwissfrancagaincameunderslightupwardpressure,mainlyagainsttheUSdollar.ThenewversionoftheFederalReserve’supdatedinflationtargetpolicywasinterpretedbythemarkettomeanthattheFedwouldcontinuetopursueahighlyexpansionarymonetarypolicyfortheforeseeablefuturetoallowinflationtoovershootitstargetinthenearterm.TheannouncementcausedasteepdropinrealUSinterestrates,draggingdowntheUSdollar.TheEUR/CHFratebenefitedfromthehistoricdecisionbytheUSheadsofstateandgovernmentonJuly21todrawuparecoveryplanandfinancialframe-workcoveringtheyears2021–2027.ThiswasdespitetheECB’scontinuedextrememonetaryeasingandverbalinterventionsagainstthestrengthoftheEUR/USDrate.TheSNBleftitspolicyrateunchangedat-0.75%andannounceditswillingnesstointerveneintheforeignexchangemarkets.Basedonthetrendinsightdeposits,weestimatethatthecentralbankwasactiveontheforeignexchangemarketoncemoreduringthatperiodbutnotquiteasmuchasinthetwoprecedingquarters.ThepoundsawmodestappreciationafteroptimismbeganspreadingaboutthelikelihoodofapositiveoutcometotheBrexitnegotia-tions.
Duringthefourthquarter,theequitymarketintheUScameunderpressuretowardstheendofOctober,sincefearoftheCOVID-19pandemicandthelackoffiscalincentivesincreasedaheadoftheNovember3elections.AtthebeginningofNovember,theSNBstressedthat,duetothelowinflationarypressureandthepersistentfragilityoftheeconomicsituation,itsexpansionarymonetarypolicy–cou-pledwithnegativeinterestratesandthewillingnesstointervene–remainednecessary.SightdepositsattheSNBincreasedinOctober,buttheyfellagainpartiallythefollowingmonth.TheoutcomeoftheUSelectionsandpositivenewsabouttheCOVID-19vaccinewerethemostsignificanteventsinNovember.AfterDemocratJoeBidenwonthepresidencybuttheSenateremainedinRepublicanhands,themarketsturnedtheirattentiononcemoretothe“COVID-19cycle.”FollowingweeksofrelativelynegativenewsinwhichthemarkethadbeenconcentratingonrisingratesofinfectionandnewlockdownsinEuropeandtheUS,themarketswererelievedtohearpositivemessagesconcerningavaccine.DuringitsDecembermeeting,theECBannouncedfurthermonetaryeasingmeasures.Thus,thecentralbankincreasedandextendedthepurchasesofbonds.Inaddition,itwillalsograntmorelong-termcreditsatfavorableconditionsforanotheryear.
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Planning and flexibility: Golden rules of currency hedging
the notional amountandcouponatmaturityoccurseitherintheinvestmentcurrencyorinthechosenalternativecurren-cyatapre-agreedexchangerate.Therefore,itisimportantthatclientsalsohaveanintrinsicneedinthisalternativecurrencyincasetheywouldgetconverted.
What should companies absolutely avoid when it comes to currency management? Acurrencypairtradingwithinaparticularrangewon’tremainatthatlevelforever.Thequestionisnotif,butwhenthepricewillbreakoutofitscurrentrange.
ThiswasconfirmedlastyearinthecaseoftheUSD/CHFcurrencypair.Thedollar/Swissfrancexchangerateremainedwithinanarrowbandofbetween0.96andparityinthesecondhalfof2019.CompanieswhichneededtoselltheUSdollaragainsttheSwissfranccouldexpectarateof0.99orparityinordertoprotecttheirfinancialposition;mostofthemthereforedecidedtokeeptheirpositionunhedged.Butinfactthiswasagoodtimeforhedgingasthevolatilitywaslow.Wethenbegan2020withanexchangerateof0.98,butoverthecourseoftheyear,thedollarunexpectedlywentto0.90inAugust2020.Manycompanieshadn’tanticipatedthis,andthereforeweren’thedged.So,someofourclientshadtosellUSDagainstCHFatbelowthebenchmarkrateandthereforesuffereda majorlossversustheirreferenceprice.
And how do you advise companies to deal with a situation like the COVID-19 pandemic? Pasteventsshowthatprotectingthecompany’sfinancialpositionorprofitmarginisthekeything.Westronglyrecommendhedgingexchange-rateriskagainstcurrencyfluctuations.EvenifacompanyhaslessvisibilityandmoreuncertaintyduetotheCOVIDsituation,itisimportanttohedgetheexposure.Themoreuncertaintyacompanyhas,themoreflexibilityitwillneed.
Lisa, the past year has brought plenty of surprises. What has 2020 taught us, in your view?2020hasremindedus,onceagain,thatunpredictableeventscan–anddo–occur.Inthepastfiveyears,wehaveexperiencedeventslikethis,suchastheremovalof theEUR/CHFfloorbytheSNB,theBrexitreferendum,andtheoutcomeoftheUSpresidentialelectionin2016.In thelastyear,we’veseenCOVID-19takethewholeworldbysurpriseandturnsomanythingsupsidedown.That’swhyitisreallyimportantforacompanytohedgeits exposure.
Does this environment have an impact on interest rates?So,wecouldscarcelyhaveexpectedtheFed’skeyinterestratestobeclosetozeroattheendof2020.ButintheearlypartoftheyeartheFedwasforcedtomakearapidcutinkeyinterestratesfromthe1.50–1.75%targetrangeto0–0.25%,inotherwordsbacktothe2015level.
ExpectationsthattheEuropeanCentralBankwouldhiketheinterestrateonitsdepositfacilityinthefirstquarterof2021likewiseevaporatedquickly.We’rethereforelikelytoremaininalowinterestrateenvironmentintheshorttomediumterm.Andthat’sthesituationwe’vegottoaddressrightnow.
Is there still a solution for companies that are looking for a positive return on their liquidity?Duetotheiractivities,ourclientsmainlyhavecashinCHF andEURandhavetotakeintoaccountthisissuein conductingtheircashmanagement.
Manyclientsmakeuseofaliquidityoptimizationinstru-mentcalled“DualCurrencyDeposit.”Thisallowsthemtomakeadepositwithahigherreturncomparedtoatradi-tionalmoneymarketinvestment.However,asaforeignexchangeriskislinkedtothissolution,theredemptionof
Lisa Mahi, FX Sales Corporate & Institutional Clients, aims to provide her clients with expertise and to add value. In this interview, she reflects on the events of the last year, their impact on exchange rates, and on promising strategies for FX management. From prevention to crisis management – our expert has the answers.
FX Survey 2021. Assessment of exchange rate developments. 21
During the crisis, what have proved to be the best strategies for addressing currency fluctuations? Theforwardisstillthepreferredinstrument,althoughit’snotalwaystherightsolutioninavolatileenvironment.The factis,althoughaforwardtransactionmeansyou’rehedgeditalsomeansyouwon’tbeabletobenefitfromanymovementinyourfavor.Nordoyouhaveanyflexibilityin termsoftheamount.Andinanuncertainenvironmentit’salwaysadvisabletoretainacertainamountofflexibility.Becauseyoucanneverbesurewhetheryourprojectionswillcometrueornot.Flexibilityisthereforekey.
And how do companies achieve this flexibility when it comes to currency hedging? Werecommendchoosingbasichedgingsolutions,suchas purchasingoptions,whenvolatilityislow.Enteringintoa participatingforwardisanotherattractivealternativesolution.That’sbecauseyoudon’tneedtopayapremiumandyou’refullyhedgedfortheamountbutonlyliablefor50%.So,ifthecurrencypairmovesinyourfavoryoucanbenefitfromanFXmoveinyourfavoron50%ofthenominalhedged.
Is there actually a way companies can prepare for a possible crisis?Planningandpreparingforaworst-casescenarioisimportant.Analyzingandhedgingyourcurrencyexposureshelpsyouidentifyanddealwithrisks.Everycompanyhasitsownconstraints.That’swhyabespokestrategythat’stailoredtosuittheneedsofthefirmisalsovital.
And,asImentionedbefore,adegreeofflexibilitywillhelpyoucopewithunexpectedeventssuchasthosewe’veseenoverthepastyear.Ifyoufollowthesegoldenrules,you’llbeinabetterpositiontohandleanycrisis.Aspartners,weatthebankareheretoadviseandsupportyou inthisprocess.
The growth of digitalization in day-to-day work has been one of the main implications of the pandemic for many professions. Working from home is now the norm for many people around the world. What digital solutions does Credit Suisse offers its clients in the FX space? Duetothepandemic,mostofourclientswereforcedtoworkfromhome.Asface-to-facecontactwasnotpossible,weusedthephonetogivethebestpossiblesupport.With“mySolutions,”wealsoofferanattractiveFXtradingplatformthatprovedverysuccessfulduringthelockdown,too.ThisallowsclientstoenterFXtransactions,issuelimitorders,viewpositions,andmonitormarkettrends.Morethan200currencypairs,includingpreciousmetals,areavailableontheplatform.What’smore,duringextendedopeninghours–from7:00a.m.to10:00p.m.Swisstime–clientshavedirectaccesstothisplatformviaonlinebanking.
LisaMahi,FXSalesCorporate&InstitutionalClients,isakeycontactwhenitcomestocurrenciesforcompaniesand institutions.ShehasadvisedCreditSuisseclientsin theSuisseRomanderegionsince 2014.
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Currency hedging strategies for every market environment
Thelastfewmonthshavebeenturbulentandcharacterizedbymajoruncertainty.WiththespreadoftheCOVID-19pandemicandtheintroductionof–insomecases–severerestrictions,suchasborderclosuresandtheclosingofentiresectors,manycompanieshavelostareliablebasisforplanningtheiroperations.Moreover,marketvolatilityhasincreasedonaccountofthelockdowns.Majoruncertainty,
Forover18years,IreneBussmannfromtheFXSalesDeskinZurichhas beenadvisingcorporateclientsonhedgingtheirforeignexchangerisks–firstintheregionofBaselandnowinCentralSwitzerland.Eventhoughtheenvironmenthasconstantlyevolvedoverthepastfewyears,therearestillprovenapproachestohedgingagainstoroptimizingforeignexchangerisks.Thechoiceofhedgingandoptimizingsolutionsishighlydepen-dentonacompany’smarketexpecta-tions,riskability,andrisktolerance.Table1showsthisusingtheexampleofanimporterorthebuyerofforeigncurrencies.
Eachsolutionhasrisksandbenefits,asTable2showsusingtheexampleofanimporterthatwishestocoveritsneedforeuros.However,itisperfect-lycleartoIreneBussmannthatitalwaysmakessensetohedgerisks.Thatisbecausecurrencyhedgingcangivecompaniesamorereliablebasisforplanningand allowthemtofocusontheircore business.
Market expectation/ Product category
Lower exchange rate
Stable exchange rate
Higher exchange rate
Basic hedging Buyacalloption Riskreversal Forwardtransaction
Advanced hedging Leveragedriskreversal Leveragedriskreversal
Outperformance strategy
Ratioknock-outforward Ratioknock-outforward
Product Brief description Hedging level
Advantages Disadvantages
Buy a call option
Calloptionsaresuitableforclientswhowishtoprotectthemselvesagainsthigherexchangeratesbutprofitcompletelyfromanydevalu-ationintheEUR.Theyarepreparedtopayapremiumforthatright.Thepremiumisduetwodaysaftereachtransaction.
Fullyhedged
ȷ Protectionagainst higherexchangerates
ȷ Fullpotentialtoprofitfromfallingexchangerates
ȷ Lossesarelimitedtothepremiumpaidinadvance
ȷ Requirespaymentof apremiumuponconcludingthetransaction
Forward transac-tion
Forwardtransactionssafe-guardagainstundesirablemovementsinFXrates.The trade(s)is/areexecutedasarrangedonthefuturedate(s)ofyourchoosing.Dependingontheinter-estratespreadbetweenthe currenciesinvolved,youwillbechargedextraorgivena discountonthespotprice.
Fullyhedged
ȷ Protectionagainsthigherexchangerates
ȷ Nopotentialforparticipatinginpositivemarketmovements
ȷ OTClimitisrequired
Table 1
Table 2
lessabilitytoplanahead,andhighervolatility–adifficultsituationformanycompanies.Managingrisksismoreimportantthaneverbefore.Currencyrisksareoneofthebiggestchallengesfacingmanycompaniesduetotoday’shighdegreeofinterdependenceintheinternationaleconomy.
FX Survey 2021. Assessment of exchange rate developments. 23
Whatdoesallthismeanexactly?Usingtheexamplebelow,IreneBussmannexplainsthevarioussce-nariosacompanymayfaceand howdifferenthedgingandoptimizationsolutionsworkdepending onmarketconditions.
ASwisscorporateclientimportsproductsfromalloverEuropeandhasaregular,monthlyneedforeuros.To ensureithasagoodbasisforplanning,thecompanywantstohedgeoroptimizeitsneedforthenext12 months.Table3illustratesaselec-tionofvarioushedgingandoptimizingsolutionsfor12monthlyexpirationdates.
Risk reversal
Riskreversalissuitableforclientswhowishtoprotectthemselvesagainsthigherex-changeratesbutdonotwanttomissoutonextra profitpotential.
Fullyhedged
ȷ Protectionagainst higherexchangerates
ȷ Potentialforparticipationdowntothelowerstrikelevel
ȷ Iftheexchangeratetradesbeloworatthelowerstrikelevelonexpiry,theEURwillhavetobepurchasedatthelowerstrikelevel
ȷ OTClimitisrequired
Lever-aged risk reversal
Leveragedriskreversalissuitableforclientswhowishtoprotectthemselvesagainst higherexchangerates butdonotwanttomissoutonextraprofitpotential.However,protectionappliesonlytoaportionofthe no-tionalamount.
Partiallyhedgedup to50%
ȷ Partialprotectionagainsthigherexchangerates
ȷ Potentialforparticipationdowntothelowerstrikelevel
ȷ Iftheexchangeratetradesbeloworatthelowerstrikelevelonexpiry,theEURwillhavetobepurchasedatthelowerstrikelevel
ȷ Protectionappliesonlytoaportionofthenotionalamount(leverage)
ȷ OTClimitisrequired
Ratio knock-out forward (RKOF)
Theratioknock-outforwardisabespokeOTCsolutionthatgivesyoutheopportu-nitytobuyaportionofyourforeigncurrencyneedsatalowerlevelthantheaverageforwardrateonthetradedate,aslongasthebarrieris notreachedorbreached.
Noprotec-tion,onlyoptimization
ȷ Profitpotentialas longasaknock-outeventdoesnotoccur
ȷ Ifthebarrierisreachedorbreachedatanytimeduringtheobservationperiod,theentiretransactionisterminatedimmediately
ȷ AnRKOFisnotahedgingsolution
ȷ OTClimitisrequired
Product Price levels
Buy a call option Strikeprice:1.1000Averagepremium:0.75%ofnotionalvalueinEURTherefore,hedgingatotalofEUR1million,forexample,wouldcostEUR7,500.Thepremiumisduetwodaysaftereachtransaction.
Forward transaction Averageforwardrate:1.0733
Risk reversal Higherstrikeprice:1.1000Lowerstrikeprice:1.0585
Leveraged risk reversal
Higherstrikeprice:1.0805Lowerstrikeprice:1.0585
Ratio knock-out forward
Strikeprice:1.0650Knock-outbarrier:1.1100
Table 3
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Now,whathappensifthecompanydecidestopurchaseacalloptionandtheEUR/CHFexchangerateontheexpirationdatefallsto1.0000,or whathappensiftheEUR/CHFrateclimbsto1.15ontheexpirationdateinthecaseofaleveragedriskreversal?Table4showsananalysisofthecashflowsiftheEUR/CHFratedepreci-atesto1.0000,experiencessidewaysmovementandremainsat1.0750,andiftheEUR/CHFrateclimbsto1.1500.
Earlyanalysisofyourcashflowsisessentialtofindingtheappropriatehedgingoroptimizingstrategythatbestmeetsyourneeds.However,yourpersonalmarketassessmentandyourcompany’sinternalhedgingregula-tionscanaffectyourchoiceaswell.
Havewesparkedyourinterest?Ourspecialistsinthevariousregionslookforwardtoreceivingyourcallandwillbegladtoassistyouindevisingahedgingoroptimizingstrategytailoredtoyourneeds.
Cash flows EUR/CHF = 1.0000 EUR/CHF = 1.0750 EUR/CHF = 1.1500
Buy a call option Optionexpiresworthless.Youcanpurchaseyoureurosonthemarket.
Optionexpiresworthless.Youcanpurchaseyoureurosonthemarket.
YoubuyEURat1.1000.
Forward transaction YoubuyEURatan averagepriceof 1.0733.
YoubuyEURatan averagepriceof 1.0733.
YoubuyEURatan averagepriceof 1.0733.
Risk reversal YoubuyEURat1.0585.
Optionexpiresworthless.Youcanpurchaseyoureurosonthemarket.
YoubuyEURat1.1000.
Leveraged risk reversal
YoubuytwicethenotionalamountinEURat1.0585.
Optionexpiresworthless.Youcanpurchaseyoureurosonthemarket.
YoubuythenotionalamountinEURat1.0805.
Ratio knock-out forward
YoubuytwicethenotionalamountinEUR at1.0650aslongastheknock-outbarrierhasnotbeenreachedorbreachedduringthe term.
YoubuythenotionalamountinEURat1.0650aslongasthe knock-outbarrierhasnotbeenreachedorbreachedduringthe term.
Theknock-outbarrierof 1.1100wasbreached.Theoptimizingtransactionis canceled.
Table 4
Currency hedging strategies for every market environment
IreneBussmannhasbeenworkingforCreditSuisseforover20years,18ofthoseinFXsales.ShemanagesandadvisescorporateclientsinRegionCentralSwitzerland.
FX Survey 2021. Assessment of exchange rate developments. 25
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Interview with Dr. Andréa M. Maechler, member of the Governing Board of the Swiss National Bank
Let’s now turn our attention to the economy. The pandemic has caused considerable turbulence on the markets and forced the closure of borders as well as entire sectors of the economy. What mea-sures did the SNB implement in response?ThepandemichasplungedbothSwitzerlandandtheglobaleconomyintoasharprecession.Governmentsaroundtheworldhaverespondedbyintroducingfiscalpackages,andthecentralbankshaveworkedintandemwiththesepackagesbyintroducingmeasurestogenerateadditionaleconomicstimulus.TheSNBhasadualapproachtostabilizingtheSwisseconomy:First,whilewewereinthedepthsofthecrisisitwasvitaltoreactquicklyandprovidefinancialaid.WithinaveryshortperiodoftimewesetuptheCOVID-19refinancingfacilitytohelpincreaseliquiditywiththebanks,whichtheyinturnhaveusedtosupportbusinesses.Thiswasonlypossiblethankstotheclosecollaborationbetweenthefederalgovernmentandthebanks.Second,ourestablishedmonetarypolicyinstru-mentsremaincentraltomaintainingadequatemonetaryconditions.Byinterveningontheforeignexchangemarket,weareabletocounteradditionalupwardpressureontheSwissfranc.Thenegativeinterestratenotonlyaffectstheexchangeratebutalsocreatesfavorablefinancingcondi-tionsforbusinessandforthestate.Inordertofurtherunderpinthesupplyofcredit,weprovidedadditionalrelieftothebanksbyincreasingthethresholdfactoranddeacti-vatingthecountercyclicalcapitalbuffer.However,economicdevelopmentinbothSwitzerlandandinternationallyremainsvulnerabletosetbacks,makingthemonetarypolicyenviron-mentincrediblychallenging.
And has the SNB taken any tangible steps to counter the uncertainty on the financial markets?Alongsidethecomprehensivefiscalpolicyandmonetarypolicymeasuresimplementedbythecentralbanks,oneotherkeyfactorinbringingstabilitytothefinancialmarketsduringthepeakofthecrisiswastheSNB’scollaborationwithfiveothercentralbanksaspartoftheexistingUS-dol-larliquidityswapagreement.TheaimofthiscoordinatedactionwastoconsolidatethesupplyofUS-dollarliquiditytothemarkets.ThepriceofUS-dollarliquiditywasreduced,meaningthattheimpactoftensionsintheglobalUSdollarfinancingmarketsonthesupplyofcreditforhouseholds
Many people have been working from home since the coronavirus pandemic began. What is the current situation at the SNB, Dr. Maechler?Manythingshavechangedinthewakeoftheveryparticu-larcircumstancestriggeredbyCOVID-19.TheSNBisnoexception.Thatsaid,weremaineverybitascommittedaswehavealwaysbeentofulfillingourobligations.Duringthefirstwaveofthevirus,weintroducedastrategyofhomeworkingforallrolesthatdonotrequirepeopletobephysicallypresent.Certainteamsthatperformcriticalfunctionshaveswitchedtoasplitoperationsmode,alternatingbetweenhomeworkingandbeingphysicallypresent.Despiteallthesechanges,operationscontinuedsuccessfully.Wewere(andremain)wellpositionedfrombothanoperationalandatechnologicalperspective.Forme,thegreatestobstaclepresentedbyworkinginthiswayisactuallytalkingtopeople.Itcanbechallengingtoshareinformationandalsotomaintaingoodinterpersonalrelationshipswhenworkingremotely.Tosucceed,wemustnotonlyusenewtoolseffectivelyinordertocollaboratebutwemustalsobeagileandadaptableinourapproach.OurSNBcolleagueshavereallyrisentothischallenge.
The Swiss National Bank (SNB) has implemented a variety of measures during the coronavirus crisis in order to counteract the uncertainty plaguing the markets. In this inter-view, Dr. Andréa M. Maechler, member of the Governing Board, talks about the strategy employed by Switzerland’s central bank and likely future money market trends.
Monetary easing as a pivotal strategy. Using the right tools to tackle the coronavirus crisis.
FX Survey 2021. Assessment of exchange rate developments. 27
andbusinesseswassuccessfullymitigated.Andinadditiontoallthistherearetheinstrumentsthatwerealreadyinusepriortothepandemic:DuringtheperiodofparticularuncertaintywethereforedoubledoureffortstoensurethattherewouldbenoexcessiverevaluationoftheSwissfrancandtostabilizedevelopmentsbyinterveningontheforeignexchangemarket.
TheSwissfrancislikelytoremainasafehaveninthefuture.
Despite everything, there has been a revaluation of the Swiss franc as a result of the coronavirus crisis. What do you think are the main drivers of this trend?Switzerlandenjoyspoliticalandeconomicstability,lowinflation,androbuststatefinances,whichmeanstheSwissfrancremainsasafehavenformanyinvestorsworldwide,highlysoughtafterinthefaceofincreaseduncertaintyonthefinancialmarkets.Inrecentyears,upwardpressureontheSwissfranchasoftenincreasedinwavesduringtimesofcrisis–aswewitnessedjustrecentlyduringthepeakofthecoronaviruscrisis.Onthemarkets,wehaveobservedthattheincreaseddemandfortheSwissfrancduringthisperiodwasdriveninparticularbyshort-terminvestorswhowereeitherbankingonfurtherrevaluationoftheSwissfrancorwantedtohedgetheirportfoliobymakinga“safehaven”investment.
And how would you sum up the current situation with the Swiss franc?TheSwissfrancremainshighlyvalued.Itscontinuedstatusasasafehavenmeansthatthereisanongoingriskoffuturerevaluations.Ourexpansionarymonetarypolicyisthereforestillimportantandthecombinationofinterven-tionsontheforeignexchangemarketandnegativeinterestratesisstillnecessary.
ItisnotthenegativeinterestrateinSwitzerlandthatisthemajorchallenge,butthegloballowinterestrateenvironment.Can the SNB also envisage further reducing the key interest rate from its current level of minus 0.75% if the upward pressure on the Swiss franc were to increase significantly again?Thereisstillscopetofurtherlowerthekeyinterestrate,andwearepreparedtoactifthesituationrequiresit.Weareawarethatthenegativeinterestratepresentsamajorchallenge.However,webelievethatSwitzerlandwouldbefacingevengreaterchallengeswereitnotforthenegativeinterestrate.Weighinguptheprosandconsisthereforealwayscentraltoouractions.Overall,thenegativeinterestratehasprovedbeneficialforSwitzerland.Ithasprovidedscopeforimprovedmonetaryconditionsintheeconomy,
andgenerousthresholdfactorskeeptheburdenonthebanksaslowaspossible.TheSNB’snegativeinterestratedoeshaveknock-oneffects,though.Itpresentsachal-lengeforbanks,pensionfunds,insurancecompanies,andsavers.Incertaincircumstancesitcanalsohaveadverseeffectsonfinancialstability,ifthedesiretosecureareturnleadstoexcessiverisksbeingtaken.ItisnotthenegativeinterestrateinSwitzerlandthatisthemajorchallenge,though,butratherprimarilythegloballowinterestrateenvironment.Whyisthatthecase?Becauseitisaglobalandstructuralphenomenon.Realinterestrateshavefallengloballyoverthelongtermasaresultofchangingdemo-graphicsanddecliningproductivitygrowth.TheSNBcannotescapethesechallenges.
Globally, however, central banks have been less focused on interest rate cuts and more on unconven-tional measures such as quantitative easing in recent months. Do you believe that controlling interest rates is becoming less important?Interestisamonetarypolicyinstrumentandremainsofcentralimportance.However,interestratesarealreadyataverylowlevel:Globally,morethan25%ofbondscurrentlygenerateanegativeyield.Thekeyinterestratesofmanyindustrializednationsareclosetoorbelowzero.Sothemarginshavenarrowedsomewhat.Thisdoesnotmean,however,thatinterestratecontrolhaslostitssignificanceentirely.Insomecountriestherehasbeenashifttosomeextenttowardother,moreextensive,measuressuchasquantitativeeasing–anapproachusedbytheECBandtheFed,forinstance.However,theultimategoalthatunitestheapplicationofallmonetarypolicyinstruments–bothconventionalandunconventional–istodeterminehowwecancreateadequatemonetaryconditionsinthecurrentenvironmentinordertosafeguardpricestabilitywhileatthesametimeunderpinningeconomicactivityaseffectivelyaspossible.
Theeconomyneedssupportinordertostayoncourse.
Many central banks were already trending more toward expansionary monetary policy even before the crisis. This trend has now been consolidated. Aren’t you concerned about the risk of high inflation in the future?ThatisnotcurrentlyariskforSwitzerland,asinflationarypressureremainslow.Ouranalysisindicatesthattheinflationratefor2020isminus0.7%,i.e.inthenegativerange.Themainreasonsforthisarethesignificantlyweakergrowthprospectsandloweroilprices.However,inflationexpectationsarefirmlyembeddedwiththepopula-tionandinflationislikelytoreturntothepositiverangeinthemediumterm,althoughourforecastssuggestitwillremainlow–byinternationalcomparisonalso.Forthis
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reason,weneedanexpansionarymonetarypolicy;produc-tioncapacityremainsunderutilizedasaresultoftheCOVID-19crisisandunemploymentmaycontinuetorise.Theeconomyneedssupportinordertostayoncourse.Itgoeswithoutsayingthatourworkalsoinvolvesconsideringscenariosinwhichinflationpicksupagain.Ifsuchasituationweretobecomereality,however,wehavetheappropriateinstrumentsatourdisposaltocounteracttheeffects.
What sort of situation might cause the SNB’s foreign currency investments to be further eroded?Itisimportanttobeawareofthemakeupofourforeigncurrencyinvestments.Theyareadirectconsequenceofourmonetarypolicyandofactionstakeninordertonavigatevariouscrises,suchastheglobalfinancialcrisis,thenationaldebtcrisisintheeurozone,orthepandemicweareexperiencingrightnow.InordertocountertheupwardpressureontheSwissfranc,theSNBkeepsSwissfrancsforsaleandinreturnbuysforeignexchangeproducts.ThecompositionofourinvestmentsisdesignedtoensurethattheSwissNationalBankisalwaysabletoadaptitsbalancesheettotakeaccountoftheprevailingmonetarypolicyneeds.TheSNBhasthemeanstoreducethemoneysupplyifnecessary.Sellingforeignexchangeproductswouldshrinkourbalancesheetagain.Andthisiswhatwewoulddoifitwasnecessaryfromamonetarypolicyperspective.Butcurrentlythereisnoneedtoreducethemoneysupply.Currentinflationtrendsandeconomicdevelopments–bothinSwitzerlandandinternationally–suggestthatthissituationislikelytocontinueforawhileyet.
ShocksemanatingfromothercountrieshaveamajorimpactoneconomicactivityandinflationinSwitzerland.
Inflation in Switzerland, measured on the basis of the consumer price index, has been low for some years now. At the moment it is in the negative range again, as you just mentioned. Is this gauge of inflation even still fit for purpose in the current climate?Yes,inflationremainsanextremelyimportantindicatorofthehealthoftheeconomyanditdemonstratestheinterplayofsupplyanddemand.Itgivesusanaccuratepulsereadingfortheeconomy.Currently,itspulseistooweak.
And what is your opinion of the weak inflation trend in this country – especially given the fact that many nations are aiming for higher inflation of an average of 2%?Itisimportanttounderstandwhatfactorsdriveourweakinflation.Switzerlandisaverysmallandexposedcountry,afterall.Thebiggestshocksexperiencedinoureconomygenerallyemanatefromothercountries.Examplesinclude
fluctuationsinoilpricesandexchangerates,whichhaveadirectimpactontheinflationrate.ThefactthatinflationinSwitzerlandisstronglyinfluencedbydevelopmentsinothercountrieshasanimpactonourmonetarypolicy,makingitharderforustoexerciseprecisecontroloverinflationthanitisforthelargercurrencyterritories.Itisnotalwayspossible–oratleastitisonlypossiblewithdisproportionateuseofmonetarypolicyinstrumentsresultingincorrespond-inglystrongsideeffects–forustocompletelyoffsetinfluencesfromothercountries.Forthisreason,thedefinitionofpricestabilityinSwitzerlandmustalwaysallowforacertaindegreeofflexibilityintermsofourmonetarypolicyresponse.Accordingtoourdefinition,pricestabilityexistsiftheinflationrateisbelow2%butstillinthepositiverange.Ourexperienceonthisbasishasbeenpositive.
There is also another factor that sets Switzerland’s economic situation apart from that of other countries: The pandemic has driven up national debt in many countries. In Switzerland, by contrast, it is private debt that remains high, by international standards.ItistruethattheprivatedebtratioinSwitzerlandisrelativelyhighwhencomparedwithforeigncountries.TherisksprimarilyrelatetodevelopmentsontheSwissmortgageandresidentialrealestatemarket.Inrecentyears,bothresiden-tialrealestatepricesandindebtednesshaveincreasedatamuchfasterratethanincome.Naturally,thisopensupanavenueofriskthatwemustmonitorcloselyandtowhichweregularlydrawattention.Itisnecessarytorepeatedlyraiseawarenessofthisfactamongpeoplewhotaketheserisksandmustthereforebeabletobeartheconsequencesshouldtheyarise.However,thepandemicanditseconomicimpactfurtherincreasetheriskstofinancialstabilityinrelationtoprivatedebt,andthesituationcouldworsenfurtherinthefuture.Overall,however,banksshouldbeinapositiontoabsorblossesinacrisisscenariowhilecontinu-ingtoextendcredit,thankstothesignificantcapitalbuffercurrentlyinplace.
Cashless payment has become significantly more popular, driven in part by the coronavirus crisis. Is physical cash likely to disappear from the market in the long term?Thepandemicledtoarelativelysharpfallintheuseofcash.Therearetworeasonsforthis:First,economicactivityhasdecreasedduringthepandemicandtheretailtradewasseverelyrestrictedduringthelockdown.Second,forhygienereasonstransactionswereoftencompletedwithoutusingcash.Despitethesedevelopments,weexpectbothcashandcashlesspaymenttoremainrelevantforthefuture.CashisstillapopularchoiceinSwitzerland,evennow.TheSNBhasamandatetosupportpaymenttransactions,betheycashbasedorcashless.Wethereforesupportandsecurebothofthesepaymenttypes.
FX Survey 2021. Assessment of exchange rate developments. 29
Dr.AndréaM.MaechlerhasbeenamemberoftheGoverningBoardoftheSwissNationalBank(SNB)sinceJuly2015.Priortothat,hercareertookherfromtheOrganizationforEconomicCo-operationandDevelopment(OECD)totheWorldTradeOrganization(WTO),totheInternationalMonetaryFund(IMF).Dr.AndréaM.MaechleristhefirstwomantobeappointedtotheSNBGoverningBoardbytheFederalCouncil.
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Givaudan SA
currenciesonthemarket(AUD,CAD,EUR,JPY,NZD,SGD,GBP,SEK,CHF,USD).Wealsoconducttransac-tionsinalargenumberofemerging-marketcurrenciesthathavebeenveryvolatileinrecentmonths,”saysAntonioNota.“Highvolatilityandthefactthatwetradeinvariouscurrenciesautomaticallyinvolverisks,”heexplains.“YoucouldsaythatGivaudanisparticularlyexposedtotransac-tionrisk,translationrisk,orpre-transactionrisk.Essentially,however,we’resimplydealingwithaneconomicrisk,”saysthefinanceexpert,adding:“Therealchallengeistocreatethebestpossibleconditionsforcurrencytradingandensurethatthefinancialrisksareminimized.”
TheTreasuryteamatGivaudanSAplaysamajorroleinthemanagementoffinancialrisks.“Ourgreatestchallengeistoensurethatthefinancialriskstothecompanyaremini-mized,”explainsAntonioNota.TheFinancedepartmentactsasanadvisortothegroup.TheTreasuryteamaimstoprovidereliableadviceandsolutions,thelong-termgoalbeingtohelpmitigatetheimpactofcurrencyvolatilityandhedgeagainstrisks.AsAntonioNotapointsout:“OurTreasuryteamaimstohelpthefirmtobenaturallyhedgedatalltimes,andtohedgerisksonlyiftheycan’tbeeliminatedthroughsomeprocessadjustmentsinternally.”Hesayshisdepartmentpursuesaclearstrategyinrelationtocurrencytrading,hedging100%oftheexistingtransac-tionrisk.It’sanapproachthathasworkedinthepast,accordingtoAntonioNota.WhentheEURminimumexchangeratewassetatCHF1.20,forexample,thecompanyconsciouslydecidedtocontinuehedgingtheriskassociatedwiththecurrencypair,ratherthanusevalueatrisk(“VaR”)thatsuggestedleavingtheriskpositionopen.Twoyearsdowntheline,thisdecisionprovedtobetherightone.
Givaudanusesitsownenterpriseresourceplanning(ERP)systemtohedgeforeignexchangerisks.TheautomatedprocessessetupintheERPsystemmeanthatthegroupmainlyconductsforeign-exchangeforwardtransactions,butitalsousesplainvanillaoptionsaswellasstructuredandcross-currencyswaps.“Butcurrencyhedgingisn’tjustabouttheproductsthemselves–there’salotmorebehindit,”saysAntonioNota.“Weneedtotakeaholisticviewofcurrencyhedging.It’samisconceptiontoseehedgingasmerelytheconsequenceoftradinginthemarketusing
GivaudanSAistheworld’slargestmanufacturerofflavors,fragrances,andspecialtyingredients.Producedtoserveclientsacrosstheglobe,theycanbefoundeverywhere–inperfumes,householdandpersonalcareproducts,aswellasinfoodandbeverages.Thecompany’shistorystretchesback250years.“FromourhistoricalrootsinGrassein1768toouracquisitionofAlderysin2020,Givaudanhasalwaysputtheemphasisoncreativityandinnovation,coupledwithapassiontocreateproductsthatconsumerslove,”saysAntonioNota,HeadofLiquidityandFinancialRiskManagementatthecompany.“Thefirm’srisetomarketleadershipinflavorsandfragrancesismostlyduetoinnovationandalsotoawell-definedacquisitionpolicy,”heexplains.“Throughouracquisitionstrategy,thecompanyhassteadilyboosteditsvalueandisabletocontinuegrowingintermsofsizeaswellasscope.”Theflavorsandperfumesspecialisthasmade16acquisitionssince2014,representingadditionalannualrevenuesofCHF1.5billion.Intotal,GivaudangeneratesanannualturnoverofmorethanCHF6billion.
ThismajorSwissplayermanages73productionfacilitiesandoperates181sitesworldwide.Byvirtueofitsglobaldiversity,thecompanyengagesintransactionsinahugearrayofcurrencies.“Wetradeinsomeofthemostliquid
Givaudan SA is renowned world-wide for the fragrances, flavors, and specialty ingredients that it produces. However, this global presence also presents a challenge for the company when it comes to currency hedging. Antonio Nota, Head of Liquidity and Financial Risk Management at the company, out-lines the strategy that enables the sector leader to overcome this hurdle every time.
Minimizing foreign exchange risks with a systematic hedging strategy
FX Survey 2021. Assessment of exchange rate developments. 31
options,forwards,etc.Ithinktheimportanceofhedgingliesmoreinexamininghowyoucanbenaturallyhedgedatalltimes,”saysthefinanceexpert.There’snomagicformula,inhisview.True,theTreasuryteamcanintervenetohelpreducevolatilitybyusingmarketinstruments.Butultimatelyeachmethodneedstobereadjustedinlinewiththemarketenvironmenttoprotectthegroupagainstforeignexchangerisks.“Flexibilityisveryimportantwhenthemarketandtheeconomicenvironmentarechanging.Thatmeansweneedtobeabletopredicttheimpactofouractivitiesatalltimes.Knowledgeisanessentialprerequi-site,butultimatelyitalsocallsforahealthydoseofcommonsenseoncewedecidetoimplementastrategy.”
FlexibilityandahealthydoseofcommonsensewerelikewisenecessaryduringtheCOVID-19crisis.“Weanalyzedourentirecurrencyportfolioattheonsetofthepandemic,andwemadesomechangestothestrategy,”saysAntonioNota.Forexample,thepandemicshowedthatsomevolatileEMcurrenciescanfallsharplyduringacrisis.Wethereforetookimmediateactiontohedgesomeselectedcurrenciestominimizetheimpactonthefuturecashflow,takingtheviewthattheavalanchewasonlyjuststarting.Thelessonlearnedfromthiscrisiswasthatitisimportantandmakesalotofsensetoincreasecollabora-tioninternallywithotherfunctionstofillthegapsoncetheyhavebeenidentified.Treasurycanbuy“time”butonitsowncannotmitigatetheriskinthelongterm.Inprinciple,however,Givaudanisstickingtoitschosenhedgingstrategy.“Wecontinuetopursueourgoalofbeingfullyhedged,”saystheexpert.
GivaudanwasestablishedinZurichin1895andhas beenheadquarteredinVerniersince1898.The companyemploysaround14,000peopleworld-wide,andisatalltimesfocusedonitsmissionofenrichingtheworldwithflavorsandscents.TheSwissindustryleaderhasbeenlistedontheSwissstockexchangesince2000.
AntonioNotaholdsamaster’sdegreeinfinancefromBocconiUniversityinMilanandisacharteredaccoun-tant.HehasbeenwithGivaudansince2008.HavingjoinedasTreasuryCashManager,hewasappointedHeadofLiquidityandFinancialRiskManagementinJanuary2018.Withover20yearsinfinancialservices,hisexpertiseliesincompetitiveanalysis,financialmod-elling,long-termplanning,andriskmanagementto driveoverallbusinesssuccess.
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Thermoplan AG
broadmarketcomprisehalfofwhatweproduce,”saystheCFO.“Theotherhalfismadeupofmachinesforourthreekeyaccounts.”TheUSisThermoplan’sbiggestsalesmarket.InEurope,salesareboominginparticularintheUK,Germany,andtheNetherlands.AndthecompanyhasalsogainedmarketshareinChina,Taiwan,andSouthKorea.Thesesuccesseshavemadeitpossibleforthecompanytoestablishastrongnetworkspanningtheglobe.“Wecurrentlyhavemorethan100partnersfromallovertheworld,”saysKilianSchmidig.
Giventhisglobalnetworkofdealers,itwouldbereasonabletoassumethatThermoplanAGhastointegrateapatchworkofcurrenciesintoitscashflow.Butthisisn’tthecase:“Fromdayone,wehavealwaysinvoicedinSwissfrancs.ThiscameaboutinourfirstmajororderwithStarbucks,”Schmidigremarks.ForThermoplan,invoicinginSwissfrancswasakeyconditioninacceptingtheglobalenterprise’sorder.Withnomorethan30employeesatthetime,thecoffeemachinemanufacturerwashardlyequippedtomanagemultiplecurrencies.ThesepaymenttermsweresubsequentlyimplementedforThermoplanAG’sotherpartnersaswellasfornewcustomers.“Nevertheless,wehaveintroducedasecondcurrency.WenowofferourcustomerstheoptionofpayingineithereurosorUSdollars,dependingonwheretheyarebased,”explainsKilianSchmidig.Althoughthisbringssomeadvantages,theaddedoptiondoesmakecurrencyhedgingmoredifficultforthecompany.Asaresult,itisimpossibletoknowwhichinvoiceswillbepaidinwhichcurrency.“Inprinciple,italwaysbalancesoutintermsofvolume.WhentheSwissfrancisstrong,customerstendtopayineuros.Wethenusetherevenuesinforeigncurrencytopayoursuppliers.Thisiswhatwerefertoasournaturalhedging.”
Naturalcurrencyhedginggenerallyworkswell,thoughitdoespresentcertainchallengesforthecompany,suchaswhenunexpectedeventsoccuronthemarkets.“In2011,wefacedextremelystrongeuroinflowsbecausetheSwissfrancappreciatedsomuch.Weendedupwithasurplusofeuros,”saysKilianSchmidig.Hegoesontoexplainthat
ThermoplanAGdevelopsandproducescommercial-grade,fullyautomaticcoffeemachines.Butthishasn’talwaysbeenthecase.Thefamilybusinessfocusedonmilkfrothersandcreammachinesinitsearlydays,beforeitsfirstcoffeemachinecamealongin1995.Thatwasthebeginningofthecompany’srapidrisewithinthesector.Byshiftingfromspecializeddevicestofullyautomaticcoffeemachines,Thermoplanevolvedfromasmallfamily-ownedbusinessintoasuccessfulSwissexporter.Thissuccesswasnofluke.Ittakesflexibilitytobeabletorespondtothecustomers’needs,saysKilianSchmidig,CFOofthecompany.“Ourmottois:Yourchallengeisourpassion.Weaimtounderstandourcustomersandtheirneeds,andtoinspirethemwithoursolutions.”Growingatsuchasteadyratealsorequiredinvestmentinautomationanddigitalizationinordertooptimizethecompany’sinternalprocessesandallowittooffersuchawiderangeofinnovativeproducts.AsKilianSchmidigalsopointsout,“Weshouldn’tforgetouremployees,allofwhomarehighlytrained,motivated,andpassionateabouttheirwork.”
Today,Thermoplan’scustomersarebasedinover80countriesaroundtheworldandincludeStarbucks,oneoftheindustry’sleaders.Whatisthecoffeemachinemanufacturer’ssecret?“Diversification.Intermsofbothourproductsandourpartners.Standardmachinesforthe
Swiss exporter: The perfect brew of innovation, from product to currency hedging Thermoplan AG in Weggis uses innovative methods to ensure that their machines produce the finest cups of coffee. Currency hedging is just one more example of their unconventional approach. CFO Kilian Schmidig explains how the company uses natural hedging to smooth exchange rate fluctuations.
FX Survey 2021. Assessment of exchange rate developments. 33
thecompanyspentthefollowingyearsreducingthissurplus.“Ittaughtusthatweneedtoreactfaster.”Thermoplansubsequentlyadapteditsownsupplychainstrategy.WherethevalueiscreatedinSwissfrancs,paymentisnowfixedinSwissfrancs.ThecompanyusesforeigncurrenciestopayforvaluecreatedoutsideSwitzerland.AccordingtotheCFO,thisallowsthecompanytobenaturallyhedged,evenintimesofcrisis.Andthemodelworkswell.“Bykeepingourforeigncurrencyholdingsatalowlevel,naturallyhedgingcurrencies,andbuyingadditionalcurrencyasneeded,wehavealwaysmanagedtoturnaprofitinrecentyears,”saystheCFO.Thecoffeemachineexpertgenerallykeepsforeigncurrencyholdingsquitelow–aninventoryoflessthantwoweeks.
IfThermoplanAGneedsadditionalforeigncurrencybeyondwhatitholds,itaccessesthisthroughlimitorders*withCreditSuisse.IfadesiredcurrencypairreachestheexchangeratedefinedbyThermoplan,CreditSuissewilltriggerthepurchase.
Establishedin1974,ThermoplanAGisheadquarteredinWeggisandfocusesitsSwitzerland-basedproduc-tiononspecialequipmentforthefoodindustry.Duetostrongdemandfromitspartners,thefamily-ownedcompanydevelopedandproduceditsfirstfullyautomat-edcoffeemachinein1995andimmediatelygainedafootholdintheindustry.ThermoplancurrentlysuppliesindustrygiantssuchasStarbucks,Nespresso,andCostaCoffee.KilianSchmidigjoinedThermoplanin2008.Aftergraduatingwithadegreeinbankingandfinance,hetookontheroleofCFOin2014.SchmidigandThermoplan’sover400employeesareparticularlydelightedbythenewshuttlewarehousesystemthatthecoffeemachinemanufacturerrecentlyputintooperation.Thesystemmakesinternalprocessesmoreconvenientandefficient.
KilianSchmidigisverypleasedwiththiscollaboration.“CreditSuisseprovidesuswithexcellentadvicecoveringmanydifferentareas.”Thermoplan’spartnershipwithCreditSuissehaslastedmanyyears.TheBankforEntrepreneursaimstotackleinquiriesandclarificationsrelatingtovarioustopicsinawaythatallowsthesupportedcompanytofullyfocusonitscorebusiness.ThermoplanAG’sCFOappreciatesthisconcept.“CreditSuisseisabankseekingsolutions.Abankthatgoestheextramiletoidentifynewopportunitiesandoptionsforitsclients.”
*Whenanexchangetransactionismade,alimitordercanbeplacedbyindicatingtherateatwhichthetransactionshouldbeexecuted.Thetransactionisexecutedassoonasthedesiredrateisreached.Alimitorderisalwaysissuedwithatermdefininghowlongtheorderisactive.
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ArrowMetals and Trading AG
integratedintothesupplychain.Logisticsisanimportantkeyfactor,”saystheGroupCFO.TherawmaterialsareobtainedprimarilyfromemergingmarketsintheCaribbean,LatinAmerica,andAfrica,beforebeingshippedtoEurope,theAsia-Pacificregion,andAmerica.“Weprocure,store,blend,andrefinetheproducts,wherevernecessary,anddeliverthemtotheend-consumerwiththerightqualityand attherighttime.”
Aswiththemajorityofcommoditytradinghouses,com-moditiesaremainlyboughtandsoldinUSdollarsinthecaseofArrowMetalsandTradingAGtoo.Thisbeinga globalbusiness,thefirmisexposednotonlytomarket,credit,andperformancerisksbutalsotoadegreeof cur-rencyrisk.“AswellasourheadquartersinSwitzerland,weoperatelocalbranchesinthelikesofShanghaiandSin-gapore.Localcurrenciesoftencomeintoplayhere,”saysPeters.SomeoperatingcostsandsalestoEuropearealsowantedineurosorpoundssterling,heexplains.“InviewofthefactthatthenominalcurrencyforusistheUSdollar,andgiventhescaleofourbusiness,thesefluctuationscancausesignificantprofit-and-lossfluctuationsinourbalancesheet.”Therefore,thecompanysystematicallyendeavorstohedgeallexposuresincurrenciesotherthantheUSdollarandwhereveracurrencyriskisidentified.Thisrequirestheuseofcurrencyhedginginstrumentsformanagingand mit-igatingfinancialrisk.
ArrowMetalsandTradingcountsonthesupportofCredit Suissewhenitcomestohedgingitscurrencyexpo-sure–infact,themajorbankhasplayedapivotalrolesincethefirmwasfounded.“CreditSuissehasbeena committedpartnerofoursfromthestart,andisthereforeourtreasurybankaswell,”saysCFOPeters.Thereal-timeplatformmySolutionsisusedforthemanagementofforeignexchangerisk,heexplains.Mostofthesetradesarecoveredbyforwardtransactions.Avarietyofswapsoroptionsareusedinthecaseofalong-termexposure.The collabora-tionwithCredit Suissehasalwaysbeenstraightforward,hesays.“If arequirementcan’tbemetviamySolutions,CreditSuisseoffersanFXSalesDeskthatcanevenbecontactedlateintheworkingdayandisfullyin tunewiththerequirementsanddynamicsofourbusiness.”
FoundedasanSMEinBaar(CantonofZug)in2015,ArrowMetalsandTradingAGhasgrownintoagloballyactivecommoditiestraderinthespaceofjustfiveyears.TheSwisstradingfirmnowoperatesacrossfiveconti-nents.Whatqualitiesliebehinditsrapidgrowth?“Themainreasonsforoursuccessincludeourhighlydiversifiedcapitalbaseaswellastheuseofintelligentfinancialtechnologyandlogisticssolutions,”saysGroupCFOAlexanderPeters.Thecompanyrecognizedatanearlystagethattherewasabiggapbetweensuppliersandend-consumerswhenit cametotradefinance,heexplains.Byofferingintelligentsupplychainandworkingcapitalsolutions,ArrowMetalsand TradingAGclosedthisgap.Thetradingspecialisthasnowworkeditswayuptobecomeoneoftheleadersina nichesegment.Andthat’swhat’ssoenormouslyimport-anttoitssuccess,saysPeters:“Thekeythingforanaspir-ingcompanyistoavoidconcentratingonthemainstream.Welookedforanichewecouldcaptureandcontrol,”hesays.NickelisthesegmentwhichArrowMetalsandTradinghasmadeitsown;infact,theSwissfirmismarketleaderin thetradingofferronickel.
Thankstoitsexpertise,ArrowMetalsandTradingAGhasnotonlyestablisheditselfinthemarketplacebutalsoacquiredastrongreputationasareliablepartneramongend-consumers.Thisismainlyduetothefactthatitalsosoughttomakethelogisticsassimpleaspossible.“Althoughwedon’townthemines,we’recompletely
ArrowMetals and Trading AG is a successful worldwide trad-er of various commodities, and has established itself within the marketplace in only a few years. CFO Alexander Peters explains what lies behind its success, and how the company minimizes currency risks.
Smart solutions drive success. In both commodity trading and currency hedging.
FX Survey 2021. Assessment of exchange rate developments. 35
FlexibilityisanimportantfactorforaninternationaltradingcompanylikeArrowMetalsandTradingAG–particularlyatatimeofcrisis.“Thefactthatwecouldmanagemar-ketvolatilitysoeasilyduringtheCOVID-19pandemicwas down togeographicalarbitrageandthecompany’sglobalfootprint,”saysAlexanderPeters.“We’reontherightsideofthedemandequation.Ourbusinessmodelhasdemonstrateditsrobustnessandresilience,”explainstheCFO.However,the commoditiessectorstillfacesanotherfar-reachingchange–in theformofthetransitiontoalow-carboneconomy.Petersneverthelessviewsthisdevelopmentpositively:“Supplyingindustrywithcriticalrawmaterialsputsusinan excellentpositiontohelpshapethefutureofourplanet–afuturethatwillbebasedonsustain-ableresourcesand responsiblemining.”
BasedintheCantonofZug,ArrowMetalsandTradingAGhasbecomeoneoftheleadingnickeltradersglobally.Inadditiontotradinginnickel,itsportfolioextendsfromnon-ferrous-basemetalsthroughfer-ro-alloystothedirectshippingofore.AlexanderPetershasbeenincommoditytradingfor27yearsandisa boardmemberoftheCommodityClubSwitzerland.He iscommittedtoensuringthattheSwisscommodityhubretainsitsleadingpositioninaglobalcontext.Threeyearsago,hejoinedArrowMetalsandTradingAG.AccordingtotheCFO,thecompanystandsoutonaccountofthehorizontalstructureofitsdecision-mak-ingprocess.Hebelievesthismakesitmoreflexibleand efficientthanthemajorityofglobalcompanies.
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1e pension plans
Are there ways to avoid these redistribution effects?Yes,theycanbepartiallyavoidedwith1epensionsolutions.Firstofall,thepensionassetsin1efoundationscanbepaidoutonlyasalumpsum,notasapension.Thispreventsthetypeofredistributionwejustdescribed.Unlikeatraditionalpensionfund,employeescanalsodeterminetheinvestmentstrategyfortheinvestedpensionassetsthemselves.Companiescanoffertheiremployeesuptotenstrategieswithdifferentriskprofiles.Theinsuredcanthenindependentlychoosewhichoftheoptionstheywishtopursue,andtheyfullyparticipateintheresults.Thatmeanstheymay,undercertaincircumstances,profitfromhigherpotentialreturnscomparedtotraditionalpensionsolutions.However,theyalsoneedtobepreparedtobeartheriskofanylosses.
Mr. Stierli, one of the biggest worries of many Swiss people is having financial security as they get older. What are some of the major problems in that area?Thereformbacklogisabigproblem.Especiallywhenitcomestoemployeebenefitsinsurance,theconversionratesonmandatorycontributionsaretoohigh,makingitimpossibletofinancepensionsthroughtheretirementassetsanylonger.Aslongasthepromisesbeingmadetoemployeesarenotsubstantiallyreduced,thatproblemwillcontinuetogetworse.Forcurrentemployees,thatmeanstheywillhavetohelpfinancethepensionsofthosewhoarealreadyretiredthroughtheircontributions.BecauseofthelowerinterestratepaidonsalarycomponentsoutsidethestatutoryBVGinsurance,thisformofredistributionaffectsemployeeswithhighincomestwiceasmuch.
Good security is worth its weight in gold – not only when executing cur-rency transactions, but also when setting aside retirement provisions. Markus Stierli, Head of Pension Solutions, talks about 1e pension plans and what advantages they offer both employees and companies.
How companies can reduce risks by introducing a 1e plan
EmployeesofacompanyreportingunderIFRSorUSGAAPreport-ingstandardstransferexistingextra-mandatorypensionassetsintoa1eplan.Withthismeasure,theDefinedBenefitObligations(DBO)1aswellastheNetDefinedBenefitLiability(DBL)2willbedecreased.
CHF860,400Inclusive planDBO(benefitoriented)
1e planDBOreducedtozero,becausecontributionoriented
Base planRemainingDBO
CHF129,060
CHF86,040
CHF21,510
1DefinedBenefitObligation(DBO):Benefitrelatedobligation2NetDefinedBenefitLiability(DBL):DBOminuspensionassetplusanyassetceilingeffectassumptionSource: CreditSuisse
A win-win for companies and middle management
FX Survey 2021. Assessment of exchange rate developments. 37
MarkusStierlibeganhiscareeratCreditSuisseasanequitiesanalystin2010.Today,astheHeadofPensionSolutions,hehandlesdetailedquestionsofpensionsolutionsforSMEsandentrepreneurs.
Thecompanycanreduceitsrisks,andtheemployeescanbenefitfromthelong-termdevelopmentsonthefinancialmarkets.Thatmakesa1esolutionanattractiveoptioninmanycases.Ifyouareconsideringchangingyourpensionsolution,itisalsoworthwhiletobeginexaminingtheoptionsanddiscussthesubjectwithapensionsadvisorasearlyaspossible.
www.credit-suisse.com/future1e
From the employee’s perspective, 1e plans are highly attractive. Is there also a way for companies to benefit?Therearemanypositiveaspectsforemployersaswell.For example,1eplansalleviatetherisksofshortfallsandrestructuringinthepensionfund.Inthatregard,theyworkmuchlikefull-coverageinsurance.Furthermore,1e solu-tionsareconsideredtobedefinedcontributionplans,allowingcompaniesthatdotheiraccountingaccordingto IFRStoreducethepensionliabilitiesontheirbalancesheets.Thiscanhelpfreeupadditionalequityandallowthemtoliquidateprovisions.
Is it also worthwhile for SMEs that already have special employee benefit insurance plans for their middle management to have a look at 1e pension solutions?Inmyopinion,absolutely.Theyarealsogoodforcompanieswithonlyafewemployeeswhoexceedthesalarythresh-old.WeseethatSMEshaveonaveragefourindividualsintheir1eplans.Itismoreimportantfortheplantomatchtheemployeestructure.Thoseemployeeswhoareeligibleforsuchaplanshouldhavealongtimehorizonandacertainaffinityforinvesting.Thenthereareveryfewargumentsagainsthavinga1eplanaspartofone’spensionprovision.
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FX Survey 2021. Assessment of exchange rate developments. 39
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