Latest news with #currencyhedging
Bloomberg
03-07-2025
- Business
- Bloomberg
Trump Trade War Fuels Use of Currency Options as Hedge in Europe
European corporate treasurers increasingly are turning to the options market to hedge currency exposure, a more costly method than typically used, as Donald Trump's trade policies cause bigger-than-usual price swings. Daily volumes of currency options surged to a record in early April in the aftermath of Trump's 'Liberation Day' tariff unveil, according to data from the Depository Trust and Clearing Corp. At BNP Paribas SA, one of Europe's largest banks, corporate sales of FX options have doubled year-over-year in 2025 to an all-time high.
Reuters
02-07-2025
- Business
- Reuters
India's new light touch on FX volatility spurs hedging ramp-up
MUMBAI, July 2 (Reuters) - The Reserve Bank of India's increased tolerance for rupee volatility is prompting companies to more actively manage forex risks, enhancing the economy's resilience to global shocks. Since RBI Governor Sanjay Malhotra assumed office in December, the rupee's daily trading ranges have nearly tripled and a key volatility indicator has doubled, reflecting the central bank's reduced intervention in forex markets. The central bank is comfortable allowing the rupee to move in line with Asian peers, stepping in only to curb excessive volatility, said four sources familiar with the central bank's thinking and treasury heads at large banks. The RBI did not immediately respond to an email seeking comment. The central bank's less interventionist stance has effected a notable pick-up in currency hedging by corporates. In turn, this contributes to a more stable financial system, according to former RBI chief Duvvuri Subbarao. In the past six months, the rupee has fluctuated between 83.77 and 87.95 per dollar, prompting companies to ramp up hedging and move away from complex derivatives that carry higher risk in volatile markets. "Overall, appreciation for forex risk and hence hedging is much higher among clients than it was last year," B. Prasanna, treasury head at India's third-largest lender ICICI Bank, said. One-month implied volatility, which hovered below 2% for much of 2024, has more than doubled, reflecting the shift in market dynamics. Data from clearing house CCIL shows companies have responded to a rise in volatility. Between December and May, the total currency hedges taken by exporters and importers via forwards were higher than any six-month rolling period since 2020. "If companies hedge adequately, they are protecting themselves against currency fluctuations and minimising the chances of systemic pressure," said Subbarao, who served as RBI governor from September 2008 to September 2013. This financial stability will have implications for economic growth, he said. Subbarao pointed out that excessive interventions by the central bank could reduce the incentive to hedge, creating a moral hazard as companies outsource risk management to the central bank. He noted that inadequate corporate hedging had exacerbated pressures during the 2008 global financial crisis and the 2013 Federal Reserve "taper tantrum". Small and mid-sized businesses have especially stepped up hedging activity, treasury officials and forex consultants said. These firms try to save costs by avoiding hedging in times when the currency is stable. "RBI's change in approach has prompted an increase in our hedge ratios over the last few months," said Abhijeet Bhushan, treasurer at diamond company Hari Krishna Exports. The Mumbai-based company has annual forex exposure of about $600 million. "With the rupee moving in wider bands and the central bank adopting a less interventionist stance, we can't afford to stay under hedged to the extent we used to." Bhushan said the company is using the rupee's increased two-way swings to hedge opportunistically, at times covering up to 90% of its confirmed exposure. In the past three years, hedging levels would typically not exceed 60–70%. Company executives at half a dozen small businesses Reuters spoke to said that planning for forex risk had become imperative as even small changes in exchange rates could materially affect earnings. A senior executive at a mid-sized auto parts firm said the company had become more active in hedging during periods of rupee depreciation. That was in contrast to last year's approach, when consistent RBI intervention allowed for a more relaxed strategy, the executive, who declined to be identified as they are not authorised to speak to media, said. The executive added that other firms in the industry too had adopted a more hands-on stance toward managing currency risk. Heightened volatility has also lessened demand for exotic derivatives. Abhishek Goenka, CEO at forex advisory IFA Global which advises around 900 clients, said companies had reduced exotic options and were doing less of structures such as forward extras, enhanced collars and target redemption forwards. On hedging, he said that "overall hedge ratios have gone up among importers, whereas exporters have changed the composition of their hedge portfolio."
Reuters
30-05-2025
- Business
- Reuters
Why the dollar's wobble could be self-perpetuating
LONDON, May 29 (Reuters Breakingviews) - Foreign currency hedging is not a topic that usually dominates the water-cooler chats on trading floors. Right now, however, it's front of mind for many of the biggest players in financial markets. The U.S. dollar's unusual moves in April, when it fell in tandem with stocks, has cast doubt over a long-lasting relationship between the greenback and risky assets. Over time, it might nudge non-U.S. investors to hedge more or reduce their exposure to American stocks and bonds. Both could create a self-reinforcing downward cycle for the dollar. Investing abroad is a tricky business for money managers with liabilities denominated in the currency of their home country. Think German or Japanese insurers, whose policies are written in euros and yen, or Canadian and Australian pension funds, whose beneficiaries expect to finance their retirement in Canadian and Aussie dollars. Buying shares and debt issued by companies in other countries introduces the danger that foreign exchange swings will reduce the value of the investments in local-currency terms, even if the underlying returns are good. That is why investors tend to use foreign exchange forwards and other derivatives to hedge currency risks, effectively swapping far-flung exposures into domestic ones. The beauty of holding U.S. assets, though, is that the dollar tends to strengthen when the market panics. In money-manager speak, it's an anti-cyclical currency, which means investment bosses can get away with minimal protection against foreign exchange risk on giant portfolios of American stocks and bonds. It also helps that the dollar has generally risen in recent years, providing foreign investors with an extra boost to their overall returns. One study, opens new tab, published by the National Bureau of Economic Research, found that foreign insurers, pension funds and mutual funds hedged 44%, 35% and 21% of their respective dollar portfolios in 2020, with much higher ratios for bonds compared to stocks. Apply that range to the $30 trillion of total American assets held by non-U.S. investors as of last year, and the implication is that anywhere between $24 trillion and $17 trillion could be unhedged. Take the Canada Pension Plan Investment Board for example. U.S. dollar exposures account, opens new tab for more than half of its net investments of $520 billion, but are minimally hedged, according to a person familiar with the portfolio. Several people involved in the running of different Canadian retirement funds told Breakingviews that the safe-haven nature of the greenback was a key reason for relatively low hedge ratios. Japan's giant Government Pension Investment Fund, meanwhile, had invested almost a third of its $1.7 trillion portfolio in American assets as of March 2024 with slightly more than half in stocks and the rest in bonds. The U.S. exposure was almost entirely unhedged, a person familiar with the matter told Breakingviews. According to traders and analysts these large so-called 'open' positions in U.S. assets have caught the attention of currency market players in recent months, for two reasons. First, the dollar didn't live up to its safe-haven billing after U.S. President Donald Trump's tariff plan tanked stocks in early April. The greenback fell roughly 5% against a basket of other rich-world currencies and failed to rebound alongside the S&P 500 Index when trade tensions cooled. The upshot for foreign investors is that volatile U.S. policymaking may cause the dollar to gyrate in the same way as equity markets. If that becomes the norm, foreign investors' risk models would over time call for much more dollar hedging. The second consideration is that Trump and his advisers seem set on weakening the currency in a bid to boost exports. That is cementing a sense in foreign currency markets that the dollar is unlikely to see another 2022-style surge in strength, meaning overseas investors may be more likely to get a drag from the greenback rather than a lift. One open question is whether it is even possible for large pension funds and insurers to meaningfully increase the proportion of their dollar portfolios that are hedged. In places where local institutions' holdings of U.S. assets are large relative to the local market, such as Taiwan or Nordic countries like Sweden, a big increase in demand for FX derivatives could meaningfully affect the value of the domestic currency. The Taiwan dollar's recent surge against the greenback looks like a case in point. Even in deeper markets like the Japanese yen, euro or Canadian dollar, hedging comes at a price. The typical method is to use forward contracts, which involves locking in an exchange rate by agreeing to buy one currency and sell another at a future date. The cost is largely determined by the difference in government bond yields between the two markets. Relatively high U.S. interest rates therefore make it expensive for local investors to hedge their dollar exposure. One-year contracts currently imply a roughly 2% annual cost for Canadian and European investors and 4% for those in Japan, according to Breakingviews calculations. The implication is that institutions which hedge an extra quarter of their U.S. portfolio could reduce returns by 0.5 percentage points to 1 percentage point, all else being equal. That raises the bar for holding American assets relative to home-country ones. The alternative to extra hedging is for big institutional investors to shrink their exposure to the U.S., for example by investing the marginal euro, yen or loonie elsewhere. Pension managers and insurers generally take months or years to change their investment policies, meaning any shift won't be immediate. Yet there are signs that both may already be happening in a small way. Traders and investors say the recent slide in the dollar is partly due to extra hedging activity, which mechanically weakens the currency that is being hedged. Meanwhile, non-U.S. participation in a recent 30-year Treasury bond auction was the lowest since 2019, Reuters reported. The danger, from a dollar holder's perspective, is that these trends reinforce one another. A weaker and more volatile greenback may inflict losses on foreign owners of U.S. assets, inducing them to sell or hedge more, in turn weakening the currency even further. At some point American assets might look cheap enough for global investors to pile back in – but not before the dollar falls further. Follow @Breakingviews, opens new tab on X
Free Malaysia Today
29-05-2025
- Business
- Free Malaysia Today
FX hedging cost drop sparks debate on Asia bond defence bets
Three-month forward implied yields for dollar-won have fallen to around 1.7% this week, the lowest level in more than two years. (EPA Images pic) SINGAPORE : A decline in currency hedging costs across Asia is fueling a debate among bond investors on whether they should fortify their portfolios with cheap protection or let the opportunity slide. Three-month forward implied yields for dollar-won have fallen to around 1.7% this week, the lowest level in more than two years, signaling plummeting hedging costs for South Korean bonds. The same gauges for currencies in Thailand, Indonesia, China and India are also below their one-year averages, according to Bloomberg calculations. Currency hedging costs are falling at a crucial time for investors funding their holdings in Asia with dollars due to elevated market volatility fueled by US policy whiplash and de-dollarisation concern. However, investors with the stomach for risk could also look for any further declines in the dollar as it would enhance returns on their local currency assets. Dollar or euro-funded investors would be more comfortable investing in Asia local-currency fixed income with currency hedges, according to Frances Cheung, head of FX and rates strategy at Oversea-Chinese Banking Corp. 'There has been robust foreign inflows into China's Negotiable Certificates of Deposit (NCD) on the pick-up after hedging, and even if hedged returns narrow further after this, flows may still come in if diversification is the goal,' she added. An investor who hedges a long position in a one-year China NCD with a 12-month dollar-offshore yuan forward will pocket a return of 52 basis points over US SOFR, or 4.85%, according to Bloomberg calculations. 'Lower hedging costs or higher yield pickup will remain a tailwind for Asia local-currency government bonds, and is the most attractive in China and Thailand,' said Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence. 'Hedging costs have fallen as US front end rates remain high, while Asia front end rates are down on easing expectations,' he added. Central banks in Indonesia, India, Thailand and South Korea have lowered their key rates by a cumulative 175 basis points so far this year while the Federal fund rate has remained unchanged over the same period. A drop in forward-implied local currency yields relative to American rates makes it cheaper for US-based investors to go short Asian currencies and long the dollar for hedging against potential foreign-exchange losses on their bond portfolios. The dollar-baht three-month forward implied yields are two standard deviations below the one-year average. The same gauge for Indonesia, China and Taiwan stands at -1.40, -1.36 and -0.53 respectively. Bank of Korea trimmed policy rates by 25 basis points today as was widely expected, while flagging the likelihood of more interest rate cuts to come, which is likely to further drag down hedging costs. May inflation data from Thailand, Indonesia, the Philippines and South Korea early next month will also set the tone for monetary policies in those nations and therefore their currency hedging costs.
Bloomberg
29-05-2025
- Business
- Bloomberg
FX Hedging Cost Drop Sparks Debate on Asian Bond Protection Bets
A decline in currency hedging costs across Asia is fueling a debate among bond investors on whether they should fortify their portfolios with cheap protection or let the opportunity slide. Three-month forward implied yields for dollar-won have fallen to around 1.7% this week, the lowest level in more than two years, signaling plummeting hedging costs for South Korean bonds. The same gauges for currencies in Thailand, Indonesia, China and India are also below their one-year averages, according to Bloomberg calculations.
