A boom in corporate dealmaking, surging input costs and a focus on short-term cash flows in the pandemic. This have sent companies rushing to hedge their currency exposures this year, that gives boost to the banks. The pandemic that sent revenues tanking in 2020. This has encouraged many to hedge currency risks. The reasons for companies to lock in prices are such as the relentless supply chain pressures, a sharp rise in raw material and input costs.
The corporate demand for foreign currencies is also lifting, as a surge in mergers and acquisitions, the recovery takes hold. Global dealmaking is running at a record high this year. In early September, it had already transacted a deal with $3.9 trillion. Multinational firms are among those to have increased their foreign exchange (FX) market activity. A corporate treasurer at one FTSE 100 firm said that its auditors had told the company to hedge its exposures. Naresh Aggarwal, policy director at the London-based Association of Corporate Treasurers said that the corporate hedging activity has gone up in recent months because of the companies’ time horizons to hedge their FX exposure have shortened.
Activity by financial market players, such as the asset managers and hedge funds, surged last year because of the pandemic. Banks are benefiting from the jump in activity from firms scrambling to hedge, borrow more or expand overseas. The top three banks by market share are JP Morgan, UBS and Deutsche Bank. Data on market-wide foreign exchange volumes has a lag. Corporate activity on London’s foreign exchange markets averaged $117 billion a day in April. This is according to the latest Bank of England data. Deutsche Bank’s global head of FX, Russell Lascala, said that year-to-date FX revenues earned from the bank’s corporate client base were up significantly on 2019 levels.
Lascala said that the Deutsche Bank was pricing unusual. He added that the corporates are doing more business, they need to hedge more, they are expanding, borrowing, and doing many cross-border deals. The 12 biggest investment banks globally earned $28 billion in revenues. According to Coalition Greenwich data, that was the biggest first quarter revenue for the banks in the past six years. Small and medium-sized enterprises (SMEs) have also ramped up FX trading. Laurent Descout, CEO of payments firm Neo, said that the turnover had picked up for his cross-border business after a slow start. Descout expects to see treasurers locking in FX rates.