11 August 2016

Managing FX Risks in Uncertain Times

Hampered by contracting exports, falling oil prices and a slowdown in China, among other macroeconomic events, 2015 saw Malaysia’s currency significantly depreciate against the US dollar. Speakers at the HSBC Economic & FX Outlook 2016 forum discuss the nation’s FX outlook for 2016 and beyond.

General enquiries

A key play in the global markets throughout 2015 was the continued rise of the US dollar, particularly against emerging market currencies. In Asia this was noticeable against those from in the region's southeast, where the likes of the Indonesian Rupiah and Thai Baht depreciated over the course of 12 months by 11 per cent1 and 9 per cent2, respectively, against the US currency.

Likewise, the Malaysian Ringgit (MYR) faced significant downward pressure throughout the course of the year, falling by about 20 per cent during the same time period3. And while this move can be seen as somewhat detrimental to the Malaysian economy and local businesses that purchase in US dollars, the fundamentals of the nation's economy remain robust and the MYR's accelerated depreciation – as well as those from other Southeast Asian nations – has likely come to an end, albeit in the short- to mid-term, according to forum panellists.

"We believe the major adjustments for Asian currencies are behind us," says Paul Mackel, Head of Foreign Exchange Research, Asia Pacific, HSBC Hong Kong. "While we do not expect a complete recovery, any moves to the downside won't be as bad as 2015. And, we're not expecting anything severe to happen that could lead to a sharper decline by the MYR," he adds.

Domestic Impact

In the local context, panellists assert the importance of paying attention to factors that influence the MYR, like how the market reacts to the new central bank governor. Besides the fiscal matters, it is important to consider how foreign institutional investors perceive how Malaysian markets are developing. "Foreign investors are still quite heavily involved in the bond market, in terms of ownership, which is good, as it shows that confidence is still there," observes Mackel.

While the recent Moody's downgrade4 of the nation's economic outlook on the back of the MYR depreciating had some investors worried, the panellists were quick to point out that rating agencies are constantly adjusting their forecasts. "Rating agencies are always reassessing their forecast. Fitch, for instance, has been quite pessimistic until recently when they upgraded the country's outlook to stable5," Mackel adds.

Risk Assessment

The volatility in the nation's FX market would have likely caught many Malaysia-based businesses off-guard, with few having adequate FX risk management policies in place. However, not all businesses require a facility dedicated to managing FX risk. Mohamad Hj Derwish, General Manager, Corporate Finance for Telecom Malaysia Berhad, explains that robust FX risk management begins with understanding the type of businesses companies are engaged in. According to Derwish, the following questions should be asked in order to understand a firm's FX requirements:

  • Does the business import and export?
  • Which risks are applicable, and how significant are they?
  • Is balance sheet funding in foreign currencies significant?
  • What are the views of analysts and rating agencies, regarding a firm's FX positions?
  • To what extent should a business hedge their exposures, and for how long?
  • What instruments can be used to mitigate FX risk?

The general manager advises that due to significant exchange rate adjustments of late, businesses that rely on imports should monitor these movements and have a hedging policy in place to reduce risks or delay their impact on revenues. Depending on the nature of the business, corporates may need to look at price adjustments or importation of currencies.

Mitigation Measures

"Businesses may need to consider alternative currencies in terms of the currency used for trade, other than US dollars. Otherwise, they may need to pass on the cost to consumers. And if you can't absorb the difference in foreign exchange, you'll have to raise prices," asserts Derwish.

The general manager cautions against use of hedging and other FX risk mitigation tools, particularly those that bear high costs, as passing on these extra charges to customers will not be received welcomingly.

Rahul Badhwar, Managing Director, Head of Corporate Sales ASP ex-Greater China, Global Markets, HSBC Hong Kong, warns against improper usage of alternative currency pairs: "Changing trade currency from the US dollar may add further risk because now firms have to monitor two currency pairs instead of just one, and these currencies may be correlated."

"Treasurers should be cautious not to switch to an invoicing currency that is more liquid than their current choice. They must also consider whether the change in currency is beneficial to their trading partner," Badhwar adds.


While hedging is not a cure-all policy, it does remove undue volatility and enables businesses to focus on their core activities. Forum panellists concur that a systematic and consistent approach to risk management increases a company's ability to maintain liquidity through periods of volatility and uncertainty.

Panellists also caution against use of mitigation instruments that bear high risks, and urge businesses to carefully consider how best to use tools like FX derivatives, which are aimed at hedge currency movements.

  1. http://www.bloomberg.com/quote/USDIDR:CUR
  2. http://www.bloomberg.com/quote/USDTHB:CUR
  3. http://www.bloomberg.com/quote/USDMYR:CUR
  4. https://www.moodys.com/research/Moodys-Malaysian-ringgit-depreciation-has-limited-overall-impact-but-weaker--PR_334067
  5. http://www.channelnewsasia.com/news/business/malaysia-s-outlook-now/1952856.html

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