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Currency Doldrums Spur Complacency Risk That Could ‘Destroy Profits’

(Bloomberg) The dollar’s tightest yearly trading range in more than four decades risks lulling corporate treasurers into a dangerous state of complacency.

While hedging costs have ebbed in recent months, muted volatility has clients of foreign-exchange consultancy Tempus Inc. in Washington taking on more currency risk heading into 2020.

“It’s kind of selling insurance; it’s expensive,” said Tempus currency strategist John Doyle. “If FX volatility is low and there’s no urgency, that can fall down their list of day-to-day priorities. That’s what we kind of see with our clients.”

Among the clients stepping away from hedging are small and medium-sized multinational corporations, according to Doyle. Those companies tend to have thinly staffed treasury or accounting departments with employees “wearing different hats” rather than a dedicated currency specialist, he said.

It’s unclear where the next bout of turbulence may come from, or when it will erupt. Schamotta thinks a surprise stabilization in China or Europe’s economies could upset the dollar’s resilience. Doyle is keeping an eye on possible catalysts such as Brexit and the upcoming U.S. presidential election.

In the meantime, Doyle is advising clients to keep hedges on, despite the somnolent state the market has been in this year.

“It’s what we don’t see and don’t talk about that might sneak up on us very quickly,” Doyle said. “The point is to protect your bottom line, not to speculate.”


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