More FX volatility ahead

THE speed of movement in the foreign exchange market in the last 18 months has surprised even the most experienced observers. This trend does not appear to be abating and insurers need to be prepared for further volatility.

Andrew Smith, manager of international treasury at Anglo Irish Bank told Insurance Day: “Everyone needs to learn from the experience of the last 18 months. When sterling was worth $2 it created its own problems, particularly for those companies with dollar income and UK expenses.

“Fortunately the rate in the market has improved to the extent that it’s now not such an issue, but we must not be complacent about it.”

Echoing the presentation given at the Insurance Day Summit London by his colleague Conor Cahalane, the bank’s director of treasury for the UK, Smith explained the situation was being exacerbated by the low interest rate environment that is providing a “double whammy” by impacting the investment side of the balance sheet as well.

“The common theme is that people are looking at least to partially hedge,” he said. “But there’s no such thing as a free bet.”

He explained the speed at which the markets have been operating over the last 18 months and the sharp frequency of movement has made people realise how quickly they can be caught out.

According to Smith, whereas in the past people had a good few months to think about the position, now you have to look on a daily basis what the markets are doing.

“I don’t think people have been caught out by what’s happened, but by the speed of the market. I’ve been staggered by the volatility, particularly in the last year and half,” he said.

On the positive side, Smith said his company was seeing a growth in the number of businesses looking to use the volatility to increase yields on deposits.

“If a business is prepared to make exchange commitments, the volatility can be turned into a positive in terms of enhancing yields.”