The coronavirus pandemic continued to hold the economy firmly in its grip in 2021. On the one hand, some sectors were able to profit from sustained pent-up consumer demand of Swiss households and from the easing of Covid-19 containment measures. At the same time, due to global supply chain problems, many companies had to confront the question of procuring resources and primary products.
What do these challenges mean for the hedging of currency risks by Swiss companies? And how do they react to looming volatility as a result of potential key interest rate adjustments? Almost 1,100 companies, half of which are in the industrial sector, participated in the annual Credit Suisse FX Survey in fall 2021.
Among the results: Foreign exchange rate risks affect all sectors, but not all companies handle them in the same way.
The current study highlights the assessments and expectations of Swiss companies of future market and exchange rate trends and shows possible strategies for currency hedging in 2022.
The euro remains the most important foreign currency for the companies surveyed. 80% of respondents do at least part of their buying in euros. That makes the euro even more important for purchasing than the Swiss franc, and in all sectors. The euro is particularly strong in industry, where 85% of companies purchase in this currency. By contrast, it is used by only 71% of the companies in the service sector.
Depreciation movements in the euro should cease in 2022. Both the participants in this year’s survey and the Credit Suisse FX strategists forecast a slight appreciation of the euro against the Swiss franc. While the survey respondents expect an exchange rate of 1.08 by the end of 2022, the rate may even climb as high as 1.10 according to Credit Suisse forecasts.
"While the Swiss franc is likely to see a continued strengthening of its role as the world's strongest currency, the upward momentum in capital market yields could translate into greater volatility in exchange rates."Burkhard Varnholt, Chief Investment Officer, Credit Suisse (Switzerland) Ltd.
Overall, almost 40% of the Swiss companies surveyed hedge their currency risks. Their hedging ratio averaged about 60%. Companies with exposure to FX risks relating to Asian or South American currencies are more likely to hedge. Clients with exposure to EUR and USD foreign exchange risk, by contrast, exhibit an average tendency to hedge.
Of the 60% of survey respondents who did not explicitly hedge their currency risks, about one-third stated that an important reason was that they had “natural hedging” through purchasing and sales in the same currency. Furthermore, over half of the clients surveyed (54%) are ready to consciously accept a certain level of currency risk in order to potentially benefit from currency fluctuations.
Such a speculative approach can be risky. Especially in times when exchange rates are not volatile, there is a good opportunity for long-term hedging.
Despite increasing global inflation pressure, a large majority of 80% of the companies surveyed expect no key interest rate increase by the Swiss National Bank (SNB) by the end of 2022.
By contrast, there is more uncertainty about developments in the USA and Europe. Exchange rates may react if the central banks reduce or end their quantitative programs and raise their key interest rates in 2022. In light of the fact that the euro and the US dollar continue to be the most important foreign currencies for Swiss companies, hedging currency risks can pay off.
In the study, three internationally active Swiss companies reveal which hedging strategies they follow with respect to the expected developments.
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