Foreign exchange rates: Corporate clients' expectations and currency hedging

Swiss companies do not expect the euro to appreciate.

The majority of Swiss companies are active in foreign trade. Currency risks are part of their day-to-day business. A Credit Suisse study on foreign exchange rate development shows what foreign exchange rates corporate clients expect in 2020 and the extent to which they make use of currency hedging.

Swiss companies are concerned with currency risks

Hedging currency risks is essential for many Swiss companies, says Leif Woodtly, Head of FX Sales at Credit Suisse. And with good reason. For the fourth time in a row, Credit Suisse asked corporate clients what they think about economic and exchange rate developments in the new year.

A record-breaking 1,280 companies – including exporters and importers as well as companies who focus solely on the internal market – took part in the survey last year. Credit Suisse summarizes the results of the survey in its FX Survey 2020. It's clear that a significant proportion of responding companies hedges against currency risks.

Current exchange rates from the most important currency regions

Current exchange rates from the most important currency regions as of January 13, 2020

Source: Credit Suisse

Private consumption is the backbone of the Swiss economy

A good 52% of the companies surveyed expect stable development of the Swiss economy in 2020 after having suffered from Europe's industrial weakness in recent years. According to Credit Suisse forecasts, the Swiss economy may even see higher growth again in the new year. This is mainly due to the strength of private consumption, which is the main driver of economic development.  

Industrial weakness affects the economy and exchange rates in Europe

Swiss economy suffered from industrial weakness in Europe

Source: Credit Suisse

Foreign exchange rates may develop differently

The pressure of the past few years is likely to subside in the euro zone as well. The survey participants do not expect the euro to appreciate, and predict that the EUR-CHF exchange rate will stabilize at 1.09 by the end of 2020 (CS forecast: 1.15). At the same time, the companies surveyed expect the US dollar to remain almost unchanged, which, according to their expectations, is likely to remain at an exchange rate of 0.99 until the end of the year (CS forecast : 1.00). On the other hand, they expect the price development of the British pound to be much more volatile.

Swiss companies hedge currency risks

The survey makes clear that handling currency risks is a major challenge for companies in Switzerland. "Price fluctuations can have a significant impact on the company figures," says Alain Hasler, CFO of Scott Sports. In contrast to respondents' forecasts for the EUR-CHF exchange rate, in budgeting there is a major difference – especially for import-oriented companies – and therefore a conscious wariness. These companies use a somewhat stronger EUR rate to calculate their budgets.

Around 43% of the corporate clients surveyed actively hedge against currency risks. Surprisingly, even 40% of solely domestic companies also hedge. On average, they hedge more than 60% of their currency risks. This is also an important factor for Beat Walser, a seasoned entrepreneur and most recently chairman of Travel Trade Service Ltd: "Between 50% and 70% of foreign exchange risks should be covered." Both companies, Scott Sports and the TTS Group, are profiled in the study.

Companies active in foreign trade and the domestic market hedge currency risks

Almost 50% of importers hedge currency risks

Source: Credit Suisse

Currency hedging will continue to be important in the future

The right approach to currency management is likely to remain a key topic for Swiss companies as the volatility of the financial markets, and political and geopolitical uncertainties continue to make systematic hedging necessary. In the study, Credit Suisse experts address how companies can hedge against exchange rate fluctuations and which hedging strategies are particularly interesting.