LONDON, September 16 : Reuters - A boom in corporate dealmaking, surging input costs and a focus on short-term cash flows have made companies jump to hedge their currency exposures this year, giving a boost to banks that sell foreign exchange products.
Corporate treasurers say the pandemic, which sent revenues tanking before this year's sharp rebound in 2020, has inspired many to hedge currency risk more frequently.
Relentless supply chain pressures, and a sharp rise in raw material and other input costs that are mostly denominated in U.S. dollars, are reasons for companies to lock prices instead of new ones.
And a surge in mergers and acquisitions as the recovery takes hold is also lifting corporate demand for foreign currencies. The global business is running at a record high this year, with $3.9 trillion of transactions already transacted by late September, according to Refinitiv data.
Multinational firms are among those to have raised their foreign exchange market activity.
A corporate treasurer of one FTSE 100 firm said its auditors told the company to hedge its exposures more effectively and ensure that we only hedge the visible stream of revenues This has resulted in more volumes and smaller deals sizes. A development seen widely - Treasurers say the average hedging deal among other large British firms was between $5 million and $10 million from $20 million pre-pandemic.
Corporate hedging activity has increased in recent months because companies' time-horizons to hedge their FX exposure have reduced, says Naresh Aggarwal, policy director of the London-based Association of Corporate Treasurers (http://www.fxchange.org/).
It is a boon to currency trading desks, offsetting recent decline in revenues from investor clients.
Activity by financial market players, including asset managers and hedge funds, jumped last year as pandemic uncertainty boosted FX volatility, but in this year's calmer market, they have cut down trading.
Instead, the banks are benefiting from the surge in activity from firms who are scrambling to hedge, borrow more or expand overseas. JP Morgan, UBS and Deutsche Bank are the top three banks by market share in the $6.6 trillion a day currency markets, according to Euromoney's survey of economists.
Data on market-wide foreign exchange volumes has a leak, but the most recent figures point to a jump in corporate turnover.
Corporate activity on the London International Exchange Markets averaged $117 billion a day in April, up 16.1% from six months earlier, according to Bank of England data.
The growth of the market-wide stocks volumes, proxy for corporate activity, slightly outpaced non-financial sector growth of 15.6%, the data showing trade in the world's largest foreign exchange centre shows.
Russell Lascala, the global head of FX at Deutsche Bank, said year-to-date FX revenues earned from the bank's corporate client base were significantly up on 2019 levels and helping offset reduced investor trading, though he declined to give numbers.
Fierce competition for financial clients' business has squeezed bank profit margins. The companies in this field could provide more and lucrative business options.
Lascala said that Deutsche Bank was pricing more profitable but unusual trades for companies almost on a daily basis. Companies are doing more business, they need to hedge more, they are expanding, they are borrowing and doing many cross-border deals. In previous crises it was very different, they were not as strong and were playing defence, he said.
The 12 largest investment banks earned $28 billion in revenues after trading commodities, bonds and currencies in the first quarter of 2021, up 15% from a year earlier, according to coalition greenwich data. That was the biggest first quarter revenue for bank based businesses in the past six years.
Small and medium-sized business SMEs have ramped up FX trading.
Laurent Descout, CEO of payments business Neo, said turnover had picked up after a slow start for his cross-border business.
The company had cleared $1 billion of transactions by the end of August, much of it within the last few months, Descout said, adding that firms were eschewing more complex currency options products for more sophisticated tools such as forward contracts.
The supply chain disruptions, signs of rising inflation and uncertainty about the strength of the economic recovery should keep corporate FX hedging volumes elevated.