Risk Management - A Structural Shift in the Business FX Market

As global trade continues to grow irrespective of geopolitical tensions, natural disasters and general market volatility, business is increasingly looking towards risk management, not just with regard to physical products and services but also how they manage their foreign exchange (FX) exposure. The structural change this risk mitigation behaviour is having, and the subsequent opportunity and risk this presents for providers, cannot be taken in isolation as business growth determines the extent and speed with which these changes will occur.


When we consider that the FX related portion of annual revenue is increasing across all markets among businesses with $1-100 million turnover, as reported by East & Partners’ (East) Business FX programme, it clearly highlights the outbound view among importers and exporters and the importance placed on their international customers and supply chains. It also, by default, illustrates the increased levels of risk that result from this proactive, international strategy.


The value attributed to international relationships is highest in Asia, specifically Singapore, where FX accounts for more than three quarters of revenue, and over 90 percent among Lower Corporates ($20 - 100 million). In contrast to this is the US where FX accounts for just 60 percent of revenue, although this low figure is a result of smaller business activity. Importantly for the US though, is that they have the highest forecast growth which is interesting given the US government’s current trade war rhetoric and underlines the fact that most businesses just gets on with life, especially as it is smaller business driving this forward.


When we look at behavioural changes in the way business approaches its FX risk management it is clear that all markets are engaging in a more proactive manner, driving a structural change in the market where the proportion of FX being managed by FX Options and Forward Contracts is increasing. This is, in part, helped by the improved access and ease of use of these products combined with an increasingly educated and sophisticated business decision making process in its day to day operations.


Australian business leads the way in this regard, hedging 63 percent of its FX, at the other end of the scale, businesses in Hong Kong are managing just under a quarter of their FX exposure. Nevertheless, as stated in East’s recent Global Hedging report, this low usage among Hong Kong businesses is a significant opportunity for providers. Combined with the highest forecast growth rate by market of 3.7 percent in the coming 12 months it is an ideal time for providers with a footprint in Asia to act.


However, the significance this has in regard to value is a little more complex. Whilst Hong Kong business is reporting the highest forecast growth in percentage terms, it is US business who achieve the highest growth in real terms. Both markets are forecasting the same increase in their FX as a percentage of revenue, but the US is forecasting a greater increase in the proportion then hedged with the value of Hong Kong growth coming in second.


This also presents a risk for providers as a direct result of how the shift towards risk management solutions impacts the use of Spot FX. This is seen among Lower Corporates in the UK where a tipping point has been reached and the volume of Spot FX is decreasing.

As the market continues to evolve and risk management solutions become easier and more cost effective to access, providers need to decide where their future lies.

Are you seeing an increase in small and mid-market business FX hedging? We welcome your thoughts, comments and queries on what we’ve said, get in touch with us below