Currency and exchange rates aren’t just a concern for bankers – they affect us all. Many businesses are exposed to currency risk, whether they realise it or not.
Currency markets are currently experiencing heightened volatility due to escalating global geopolitical tensions and political polarisation, particularly in the United States. The US elections introduced significant uncertainty, influencing investor behaviour and currency valuations, as markets react to potential shifts in trade and fiscal policies.
The USD and the Swiss franc, traditionally safe-haven currencies, have seen increased demand amid global uncertainties. Emerging market currencies have also been affected. In Scandinavia, the SEK and NOK have faced pressures from both regional economic challenges and broader geopolitical risks. Meanwhile, the Chinese yuan remains sensitive to US-China relations, with potential policy changes after the US election likely to impact its stability.
Exchange-rate risk is firmly back on the agenda for companies with customers, suppliers or production in other countries.
Currency risk, also known as exchange rate risk or foreign exchange (FX) risk, refers to the potential financial loss a company, investor or individual may face due to changes in currency exchange rates.
For a company doing business abroad, the risk arises when transactions, assets or liabilities are denominated in a foreign currency. Fluctuations in the exchange rate can lead to different values in the company’s home currency than originally expected.
The key learning is that if you run a business that earns revenues abroad or has costs in other countries, you most likely have exposure to currency risk. Events outside of your control could eat away at your revenues and increase your costs. Managing currency risk is crucial to safeguard your company’s profit margins, cash flow and overall financial performance.
In our annual Treasury Survey for 2024, we asked over 150 Nordic corporate treasuries about their expectations for FX volatility in the period 2025-2030. 43% of respondents said they expect “high” FX volatility, while 53% expect “moderate” volatility in the coming years.
“There’s quite a consensus among Nordic large corporates that there will be FX volatility in the coming five years,” says survey co-author Johan Trocmé. “That’s an important issue companies will have to address in their risk management strategies.”
Currency fluctuations are also a threat to small and mid-sized businesses, but according to Nordea’s study done in late 2020, too many SME’s underestimate their currency risks. Businesses with turnovers above EUR 2M and a fair level of imports and exports said they had experienced unexpected financial losses caused by currency fluctuations during the COVID-19 pandemic. However, close to half of the SME’s had not protected themselves against this, and the survey showed that the biggest barriers for managing the risk had to do with lack of time and know-how.
On the flip side, managing your currency risks can bring your business benefits, including:
When currency exchange rates fluctuate, businesses rush to prevent potential losses. What currency risks should they hedge and how?
Understanding where and how currency fluctuations affect a company’s cash flow is not straightforward. Many different factors, from macroeconomic trends to competitive behaviour within market segments, determine how currency rates affect cash flows in a given business.
Review your business operating cycle to learn where FX risk exists. This will help you determine your profit margin’s sensitivity to currency fluctuations.
Every business is unique and that is reflected in your currency flows, but also in the structure of your assets and liabilities. It is key to understand that currency fluctuations may have an impact and the decision to hedge or not is not as simple as a roll of the dice. For a business that relies on foreign manufactures or suppliers, Nordea Markets has developed a specific service: Learn more about Exchange at home.
An effective FX policy begins with a clear understanding of the company’s financial objectives, and the potential effect the changes in FX rates might have on them: If the operative cash inflows and outflows are in different currencies, changes in FX rates might jeopardize the company’s EBITDA target. If the assets and liabilities are in different currencies, remeasuring those assets with new FX rates might jeopardize the P&L bottom line, or the equity ratio targets. The FX risk management policy ensures that whatever the financial objectives are, such FX risks that could jeopardize those objectives are monitored and mitigated, systematically.
Especially when it comes to physical products, there is a time lag between making business decisions and seeing the effects of those decisions on the company’s bank account. During that time gap, the purchase and sales orders are negotiated, materials shipped around the world and goods manufactured, stored and delivered.
In parallel to that physical process, invoices are being sent, reviewed, approved and eventually paid. Meanwhile, currencies are appreciating and depreciating. If the material and manufacturing costs are in a different currency to the sales receipts, those fluctuations in FX rates can easily wipe away the sales margins the company used as the basis for its original decision-making.
Financial instruments can help mitigate this uncertainty that jeopardizes the company’s financial objectives. This is called hedging, and it ensures that the FX rates affecting the company’s bank account balances are not too different from those used in its decision making.
Small businesses as well as large corporates can all benefit from automating their FX handling. Nordea’s award-winning and widely used AutoFX solution helps businesses free up resources, eliminate manual tasks and minimize operational risk and human errors.
Find out more about the full range of automation tools in Nordea’s AutoFX Suite, available in Denmark, Sweden, Finland and Norway. Please note that our AutoFX offering varies depending on market.
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