Saturday, January 12, 2013

FX – Old and New


Note: Allow me some ‘color’, to make a point about the very rapid changes in FX that have taken place of late.


In the late 80’s I was in touch with a few dozen US multinationals. The issue was foreign exchange risk, and what to do about it. What triggered my role were the big losses the companies kept taking.

Think of a big company in Ohio, one that had a nice business making “stuff” in Japan. They have a factory worth Yen 150b ($100m equivalent). The Treasurer worries about this balance sheet risk. He hedges it with a $100m forward short sale of Yen. At the end of the Q the Yen is up 10% against the $ and the Treasurer and the CFO meet:


CFO – How’d we do in FX?

TreasurerGreat! No gain or loss from the accounting exposure. We had a paper gain of $10m and a cash lost of $10m from the hedges.

CFOWhat! You lost $10m of my precious cash to protect a paper gain? You’re an idiot, and you’re fired!


Then you had the company who on Jan 1 budgets a profit of STG 100m from the UK operation for the coming year ($200m notional value). That profit will be remitted back to the USA at the end of the year. Twelve months later:


CFO – Great news! I just heard from London, they made their number for the year, they booked a profit of STG 106M; ahead of plan!

Treasurer – Well, actually, from our perspective, we didn’t do so good. The UK operation ended up way under what we expected. Sterling fell against the dollar, so the STG106m is only worth $170m today – the net is, we look like we’re $30m short.

CFOWhat! You didn’t hedge a cash transaction that you knew was coming? You’re an idiot, and you’re fired!


I knew a bunch of the guys (it was all guys back then) who were getting yelled at and fired. So one day I got on a plane (say, Cincinnati) and had a few drinks, after work, with one of them.


Treasurer – I’m getting my ass kicked either way. What can I do?

BK – If I was you, I’d pass the buck to the ‘big boys’ upstairs. Take the heat off of you.

Treasurer – I’m loving that! How do we do it?

BK – Write up a policy on what gets hedged, when and how. Get a sign-off on the policy from the CFO, the CEO and even the Board. I’ll help you write it up –  you steer me some Biz.

Treasurer – Sweet! That puts FX management on auto policy! I just have to follow the rules. If things go wrong, the bosses will take the blame. The policy is my ‘cover’.


Ohio is a pretty small place, and not so long after I got a call from Cleveland; another plane, more cocktails:


Treasurer – Heard you cooked up something with a pal of mine down in Cinci. I want one too. If I had a letter from you on bank stationary, about a few things on our FX policy, it would help me get it sold to the bosses.

BK – I’d by happy to do that. I’ll have something on your desk by the end of the week. Now, about that bond deal you’re doing….


In 2013  nearly all of the major companies in the world have a written policy on FX. A very high proportion of those policies have the things that I thought were important (for real and cosmetic reasons). The thinking behind the policies that were adopted:


A) We report quarterly, we manage FX quarterly.

B) We only hedge actually cash transactions that are upcoming and identifiable.

C) We can’t sweat the small stuff. 5% changes in FX rates are okay. Above 5% we have automatic stabilizers that kick in. See D.

D) We will manage FX risk by changing both the pricing and sourcing of our products. We will do this on a quarterly and semi annual basis.

E) Hedging, using FX forward and futures contracts should only be considered after every opportunity under D has been exhausted.


My point (finally), is that there is a 3-6 month lag time in the multinational’s reactions to changing exchange rates. If the FX needle moves by more than 5%, ‘things’ start to happen. Multinationals do not hedge cross border risk beyond six months, so when key FX rates move big, in a short period of time, the multinationals are forced to react in order to catch up with the market changes. Multinationals are always behind the curve, they are never in front of it.


Hello! In the past 6 months the Euro has climbed a very big 9.5% versus the dollar, a huge 26% versus the Yen, and a very important 6% versus the CNY.   As I write, those “adjustments” are happening.


German Car Company

Bean counter – According the the optimization model, at today’s FX rate we should be changing production. Increasing US, down in Germany.

COO – How big a change?

Bean counter – 2%.

COO – The dollar looks weak, make it 3%; we have to stay competitive. Maybe the Unions won’t notice…..


French Solar Manufacturer

COO – We make a global product. Our biggest competitor is China. We lost 6% in production costs against them in just six months! The Americans, and now the damn Japanese, are going to kill us. Every panel we make, must now be sold at a loss. That, or we shut down.

CEO – Don’t worry so much. Our friends in Paris will write us a check to cover the losses. After all, we have 2,000 people working in the plant…..


If the global economy were a four-legged stool, the legs would be the EU, USA, China, and Japan. As of January, 2013, the EU is by far the weakest leg of the stool. The EU also has the strongest currency, insuring a deflationary slowdown. Whatever your thinking was about Europe a few months ago, take down your expectations today. At EURUSD 1.3250 (and all the dollar based crosses) and EURYEN 119, the EU is going to take a big hit, soon.


The FX moves that are killing the EU are, in part, self inflicted. The strong Euro is an ECB/Draghi creation. The Euro price is also a function of the US/Japanese government policies to undermine the dollar/Yen. China, with its link to the dollar, is getting a free ride, a big boost, and, no doubt, a bit of a laugh.

If you try to sit on a four-legged stool that has one busted leg, you fall on your ass, look surprised or stupid, and maybe get hurt. I’m amazed that the “deciders” are engineering precisely that outcome.








  1. i love how you write, you shold be such an interesting person
    greetings from italy

  2. Massimo, Thanks for writing.

    Me? I have boring life today. Someone on another site asked for another story from this time. For some reason this one came to mind. Nothing special here, just a glimpse of the crazy times:

    There were four of us at the meeting in Dayton, we knocked the cover off of the ball with the deal that was pitched. We’re driving in a stretch limo back to Detroit to a catch the last plane to NYC. There is booze and ice, someone has a vial of coke to celebrate.

    We’re coming up to the airport and Steve (we called him “Little Stevie” as he was fresh from B school) says, “Yikes, I left my folder of papers in the conference room!”

    The account manager, guy named Tye (of all things) who was running this dog and pony show, freaks outs and asks, “The one that had the internal P/L numbers? You fucking idiot!” Driver! Make u-turn now!

    Me thinking we would end up in Detroit for the night, and what to do in that fun town…….

    So we hot-foot it back to Dayton, all the time giving Stevie some shit, get the fucking papers (left right on the table – bad move by Lil Steve), head back to Detroit, check into the Marriot downtown. Later we go out Woodward, to a steak place and some drinks. After that it was back to the city, and a strip joint.

    Tye chose the place (like he’d been there before), big neon sign on the outside flashing, “Velvet”. Maybe it was the name that drew Tye.

    It was the usual show, but there was one standout. Girl with a size 48″ set, name of April Chest (I don’t think that was her real name). She brought the crowd to their feet.

    A guy by the name of Danny Robins, who everyone called “Eggs” (I never knew why), was with us. Eggs was from Staten Island, and was as far from “Ivy” as one could get. Eggs was a Eurodollar swaps trader; these types tend to run on the wild side.

    Eggs gave April some bucks, she sneaks up behind Little Stevie (who is now three sheets to the wind) and wraps her monster breasts clean around his head. Eggs takes a picture at just the right moment. There’s a pic of a ‘suit’ holding up a G&T, the head hidden by all the flesh.

    Eggs sends the pic to the Yale Daily News, leaves a few photocopies in the inboxes of the hotties at work. Little Stevie left a month later, went to a second tier buy-side outfit, up in Boston. Never heard from him since.

  3. Bruce, ther’s a novelist in you struggling to be free.

    • Hmmm. The problem with the book is that all my little stories don’t add up to a novel. Just a bit here and there.

      I am playing with a book, I write a bit on it every once in a while. Period piece. Late 80’s, murder mystery, Wall Street, shady deals, shady guys, shady ladies, cops, money, the usual stuff.

      To do a book, I gotta stop blogging though. There are just so many hours in the day, and I’m going blind.


        Much as I’d love to read your book, this is one of the few decent blogs out there on financial events. There are so few people who:
        – Work (or have worked) in finance AND
        – Know what they’re talking about (as opposed to regurgitating crap) AND
        – Can write in an interesting manner (with some humour)

        You’re filling a much needed void. Thanks again for all your efforts.

  4. Obama bin Biden says:

    I think Little Stevie ended up marrying my sister.

  5. Bruce — How come your posts seem to always appear on ZeroHedge long before they appear on your own blog?

    • When I push the “publish” button here it goes in every direction, and I have no control. So I post it on ZH before hitting the button on my site.

      Bad idea?? I don’t really know. If anyone has an opinion on this, I’d like to hear it.

      • Posting on ZH first is fine; especially as you do regular postings here also.

        ZH is a good blog too with some great info at times. Only problem is after a bad day trading FX, reading too much of Tyler D’s doom&gloom makes me want to go kill myself.

  6. True Disbeliever says:


    The 3-hour drive from Dayton to Detroit notwithstanding, the Stevie Story could indicate a _really_ small world. You haven’t trashed the client, so let me guess: that client built a product line that was in every mom & pop retailer in the U.S. for decades? Had a strong presence in Japan? At the time you visited, had a CEO with a Master’s in finance from Columbia, who wore horn-rimmed eyeglasses when he wasn’t wearing contacts, and shared a first name with a current NY senator?

    Just askin’….

  7. Bruce
    I’ve wondered about the possibility of Chinese involvement in keeping the Euro high for some time. We accuse the Chinese of being a currency manipulator. But what if some of the Chinese intervention keeps the Euro high viz the Yuan and_since the Yuan is somewhat pegged to the dollar_also keeps the Euro high viz the dollar. Could that be why our accusation against China as a currency manipulator only seem to have volume around election time and then quickly fade away. In other words, could Chinese currency manipulation be serving our interests as well as their own? Does this make any sense? [In case it isn’t obvious, I have no professional experience in the foreign exchange markets].