25-01-2021 15:29

Currency volatility ahead – SME’s should assess and manage currency risks immediately

Too many small and mid-sized companies continue to underestimate their currency risks, according to a recent Nordea study. That’s despite the large and unexpected currency losses many companies have suffered in 2020 and the widespread concerns about company liquidity in the coming three months.
Man with umbrella

Following the outbreak of COVID-19, the fluctuations in the US dollar, Chinese yuan and euro were far more dramatic than even during the financial crisis in 2008. 

This volatility has caused large and unexpected financial losses, especially for Norwegian and Swedish small and mid-sized companies with imports from the US and China. Companies in Denmark and Finland have also been hit, especially in the retail industry. 

It also appears that around half of these companies are genuinely concerned about their liquidity over the coming three months. Nevertheless, very few small and mid-sized companies have protected themselves against or even analysed their exposure to present currency risks, which remain high. 

Read more about the findings in SwedenFinlandDenmark and Norway. (articles in local languages)

Continued uncertainty ahead 

Nordea economists forecast continued uncertainty. This is in part due to lingering concerns around the second wave of COVID-19, although a vaccine is likely to come on the scene in the near future, and uncertainty around a hard Brexit in January 2021.  

“Currency volatility remains high compared to recent years, and the lockdown crisis we went through in Q2 showcased how extreme the currency market can be at times,” says Andreas Steno Larsen, Chief Global FX Strategist in Nordea Research. 

How are Nordic companies managing currency risk today? 

While currency exchange rate fluctuations have a direct impact on the profitability of companies that engage in foreign trade, many small and mid-sized companies concerned about their liquidity feel that they cannot manage the currency risk in an optimal way. Lack of in-house competence and lack of time are the main barriers, the study shows. 

One company that has taken precautions is Swedish distributor NewGen, which is using a currency risk management strategy called layered hedging. Such FX hedging programs are designed to avoid short–term fluctuations that might threaten companies’ long-term goals. While most hedging frameworks achieve the purpose of lowering volatility, there is no strategy that pushes volatility as low as the layered approach, according to Mattias Göthberg, on Nordea Markets’ FX Sales team in Sweden. 

With a steadily growing American export business and roughly 15% of its sales in USD, Finnish furniture company Pohjanmaan Kaluste also needed a worry-free solution for managing its currency risk. The company decided to use a similar layered hedging approach to NewGen.  

Danish fashion retailer Ball Group, a European leader in the plus-sized women’s clothing segment with their brand Zizzi, has over 70% of its purchases in USD, and its sales are mostly in DKK, SEK and NOK.  A hedging strategy developed together with Nordea back in 2016 has paid off  for the company during the volatile times. 

On the flipside, these hedging strategies can demand time and resources, which are often limited for many small and mid-sized companies. Nordea’s recently launched AutoFX Hedging tool automates the hedging of FX risk and makes it possible for companies to set criteria for their hedging programs. AutoFX Hedging is available in SwedenDenmark and Norway.

Swedish mobile phone accessory maker Ideal of Sweden is one company making use of Nordea’s AutoFX currency robot to make more time for what matters – its core business. Discover how AutoFX has helped optimize the company’s processes and minimize manual work and human error.

About the survey: SME survey by YouGov on behalf of Nordea Business Banking. More than 400 small and medium sized companies participated in the online poll in the Nordics. Nordea conducted the study to assess the consequences of the currency swings and the financial health of SME’s.