Currency volatility ahead – SME’s should assess and manage currency risks immediately
The Nordic research from Nordea underscores a critical oversight by small and mid-sized enterprises (SMEs) regarding currency risk management amid heightened volatility. Per the full note, the dramatic fluctuations seen in major currencies like the US dollar and euro have caught many firms off guard, particularly those engaged in international trade. With uncertainty expected to persist due to factors such as the ongoing pandemic and geopolitical developments, timely action is necessary. This situation is exacerbated by liquidity concerns among approximately half of SMEs surveyed, calling for immediate assessment of currency exposures to mitigate potential financial losses.
What the desk is arguing
The desk echoes Nordea's urgent call for SMEs to actively manage currency risks, which have demonstrated unprecedented volatility. The report highlights how many companies still underestimate their exposures, despite the significant losses experienced during 2020's market upheaval.
Nordea points out that the volatility of currencies like the US dollar and euro has already led to substantial financial strain. For instance, Norwegian and Swedish companies reported unexpected losses tied directly to currency fluctuations, revealing the pressing need for better risk assessment strategies among SMEs.
Where it sits in our coverage
The desk notes that our current consensus target for USD/EUR sits at 1.075, with a range from 1.04 to 1.12. Analysts from various firms offer diverse views, including: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This analysis suggests a divergence, as jpmorgan aligns with a stronger outlook while bofa presents a more cautious perspective, potentially underestimating ongoing volatility indicated by Nordea.
How other firms see it
Among firms aligned with Nordea's outlook, jpmorgan supports the urgency in currency risk management amid ongoing uncertainties. Conversely, bofa reflects a more conservative stance, indicating a potential trend of undervaluing the risks described.
This situation is interconnected with broader currency behaviors, particularly evident in the EUR/USD pair reflecting the ECB's monetary policy stance, which will be crucial to monitor as liquidity concerns grow.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01SMEs significantly underestimate their currency risks, despite clear evidence of volatility.
- 02Dramatic currency fluctuations have already led to substantial losses for Nordic companies.
- 03Liquidity concerns are paramount, affecting approximately half of the SMEs surveyed.
- 04Immediate risk management strategies are essential to mitigate future financial impacts.
Market implications
Traders should watch key levels around the 1.075 mark for USD/EUR, as shifts could signal broader risks in currency exposures for SMEs. Additionally, any announcements regarding liquidity from central banks may further add to volatility expectations in these currency pairs.
Risks to this view
A significant de-escalation of current geopolitical tensions or a rapid recovery in global markets could shift perceptions of risk, potentially limiting the urgency for SMEs to hedge against currency fluctuations, thus reversing current strategies.
Corporate insights Currency volatility ahead – SME’s should assess and manage currency risks immediately 25-01-2021 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. 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 Sweden , Finland , Denmark 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.
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