Today the euro turns 13, 10 years since it stood on its own two legs like a coin or a banknote. And, like all teenagers, he experiences many challenging growth problems. However, let's not exaggerate. For at least three years now, every other quarter or month, there have been those who complain about the excessive strength or weakness of the European currency against the dollar. At this moment, as happened in the spring of 2010, it is clear that the euro is subjected to a concentric attack by international speculation and is experiencing a moment of particularly difficulty.
But, let us ask ourselves, it was better for businesses when the euro had a well-defined trend (strong decline or strong revaluation), or in these three years, in which the euro fluctuates against the dollar in a narrow range, let's say + /- 10% compared to a hypothetical central parity against the dollar? Without detracting from the Forex trading experts, who certainly have more difficulties – but also more opportunities – in a situation of very high bilateral volatility, companies have other needs: those of hedging exchange rate risks over a longer period, which ranging from one to twelve months. But before coming to address this side of the coin, it is better to analyze thehistorical trend of the EUR/USD exchange rate.
Attached are the 5-year and 1-year charts of this exchange rate (source: Yahoo! Finance – currencies). The first fixing of the euro against the US currency (1.1.1999) was 1,1667. The following two years were characterized by a continuous decline of the single currency, up to the historic minimum (October 2000) of 0,8229. From that point, continuous and progressive increases in the EUR/USD exchange rate followed – of course, with long periods of stops and retracements – up to the all-time high of July 2008. Shortly before the crisis broke out, the euro touched the all-time high of 1,60, but weakened soon after. From then to 2011, it began the oscillation continues between the 1,20 and 1,50 quotas, with continuous trend reversals. In particular, in the last year the euro started and finished near the level of 1,30, with a maximum of 1,4821 (2.5.2011) and a minimum, right at the end of the year, of 1,2939. The table below lists the two graphs of the average monthly exchange rates between the two currencies in the months between January and December 2011: as can be seen, they are between 1,33 and 1,44, with an average of 1,3984 (which will drop, slightly, when the December data are released).
What does this data tell us? That, while those who trade constantly live on a roller coaster (but isn't that precisely why trading currencies?), those in the company who have to manage the treasury in currency have had several favorable moments to carry out their own hedges. Indeed, a company must know its exposures in good time, which derive from credits for exports, from debts for imports, from budget forecasts, from loans to be received or to be repaid. And there's no need to wait until the last day to cover expected future exposures. The market provides companies with many useful tools for this purpose: foreign currency loans, short-term deposits, options and forward exchange rates. With regard to the latter, it should be remembered that in recent months, given the very small differential between the interest rates of the two currencies, forward exchange rates differ very little from spot exchange rates. Therefore it is possible to intervene with forward purchases or sales of currency by keeping an eye almost exclusively on the level of spot exchange rates, and to intervene when the pre-established thresholds have been reached.
So what are the Forecasts and of advice to give to businesses for 2012? While being aware that making forecasts on exchange rates is often a dangerous exercise, because it exposes you to bad figures, let's try to summarize some fixed points:
1. as far as forecasts on the euro – dollar are concerned, barring sensational and unforeseeable events, I don't think things will change much compared to the previous three years. There range 1,20-1,50 should still remain valid, perhaps with one more downward pressure given slower growth in Europe relative to the US and the remaining difficulties of several Eurozone countries;
2. the choice of instruments must remain restricted to those that have characteristics of flexibility, liquidity and simplicity: in other words, it is necessary to choose instruments that have a large market, are easily "disassembled" when they are no longer needed, and are easily interpreted by corporate finance. Instruments that are too complex (such as structured options or options with multiple barriers) are expensive, difficult to interpret, scarcely liquid, too demanding for corporate credit lines, and therefore essentially useless. They are to be preferred forward exchange rates and export financing for certain flows (i.e. those deriving from signed contracts, both import and export, and those deriving from certain maturities of loans and deposits), while for those expected in the treasury you can moderately use the currency options, giving preference to simple option purchases;
3. finally, the choice of the moment to intervene: if what we have said before turns out to be right, it must be done favor the low-end range for exporters (below 1,30), intervening progressively in the event of further falls of the euro; for importers better instead wait for the eventual return above the 2011 averages, from 1,35 up, also in this case with progressive purchases of currency. In recent years this strategy, of patient and dynamic management of exchange rate risk, has borne good fruit, and I don't see why it shouldn't bear fruit in 2012.
Attachments: EUR USD charts.pdf
