Hedging to pick up as companies worry over FX moves

By Jamie McGeever

LONDON, Oct 29 (Reuters) - European, Asian, and Canadian firms are likely to be more active hedging currency risk in months ahead as sales volumes pick up again and the weak U.S. dollar threatens corporate profits and planning.

Firms have had to grapple with local currency strength against the U.S. dollar this year, a fight that will intensify in 2010 should the greenback continue to weaken.

And with sales almost certain to recover from the depressed levels earlier this year, when global trade virtually ceased in the wake of Lehman Brothers' collapse, corporate treasurers around the world are drawing up battle plans.

This will likely involve wading into the foreign exchange market to protect themselves against currency moves which have already seen the dollar index, a broad measure of the greenback's value, fall 16 percent from its 2009 high in March.

The dollar index <.DXY> is measured against a basket of six currencies: the euro, Canadian dollar, yen, sterling, Swedish crown and Swiss franc.

It fell to a 14-month low earlier this month, while the euro briefly popped above the psychologically key $1.50 level and could yet make a test of its record high just north of $1.60.

A strong currency potentially damages a company's exports as it makes its goods more expensive on global markets.

"Some corporates were quite badly hit by the credit crunch and pulled in their horns on hedging. They virtually halted their hedging on oil, commodities and currencies," said Simon Smollett, FX options strategist at Calyon in London.

"So it may be that they're not hedging because they simply weren't clear as to future sales and purchases. But as that becomes more clear, maybe they will start to hedge against a further dollar slide," he said.

Another consequence of the collapse in global trade was that it actually left those exporters who had hedged at the start of this year overhedged. That is to say, when sales plummeted they simply rolled over their unused hedging contracts.

With orders now picking up, the same treasurers have to take into account the euro's rise during that period of inactivity, a treasurer at one major euro zone exporter said.

Bank of Tokyo-Mitsubishi UFJ's corporate hedge index, which gauges volumes of currency hedging by Japanese importers and exporters in the spot and forward market, rose to 53.4 in September from 50.2 in the previous month. That was still roughly half of levels seen in January 2008.

SMALL MOVES, BIGGER LOSSES

Nestle , the world's largest food group, said last week that third quarter sales fell 2.2 percent and missed analysts' forecasts, in part because of the strong Swiss franc. Drug-maker Novartis AG also said the strong exchange rate could significantly harm growth this year.

In Canada, Talisman Energy Inc , the country's No. 2 independent explorer, said it is considering managing its currency risk -- the Canadian dollar hit a 14-month high against the U.S. dollar earlier in October -- through hedges.

"Someone in our treasury department watches the movement of the Canadian dollar hourly, if not minutely, and I know there have been discussions going on internally -- if it goes too far in either direction, what would the effect be and what should we be doing about it?" Talisman vice-president David Mann said.

Bodo Uebber, chief financial officer of Daimler AG said this week that 60 percent of the company's 2010 foreign exchange exposure was hedged and that the euro above $1.50 was a concern.

Carl-Peter Forster, Chairman of Opel, General Motors' European arm, agreed.

"Industrial production in western Europe is massively under pressure due to, first, costs, and second -- which many tend to forget -- a very expensive euro and some politically undervalued other currencies in the Far East," he told an auto conference in Graz, Austria.

And an old rule of thumb was that for every one-yen move down in the dollar/yen exchange rate, Japan's largest automakers took a $1 billion hit on their revenues. They are thought to be much better hedged now, however.

ALL AROUND THE WORLD

December should bring more clarity as 2010 budgets are finalized. A spike higher in the euro above $1.55, say, could trigger some 'stop-entry' hedging, options desk traders say, but until then activity could remain relatively muted.

The lack of follow-through from the euro's initial break above $1.50 last week supports the lack of "panic" from the corporate sector, they note. For example, options traders at a large U.S. bank and French counterpart in London have not seen any of the big Italian exporters come to the market recently.

But when they do come to hedge their 2010 exposure, they will probably look to do so via plain "vanilla" contracts like forwards and straightforward put or call options instead of complex "exotic" options structures.

In Japan, exporters are increasingly hedging their foreign currency exposure over shorter periods compared to before.

"They had orders that were pretty reliable six months in advance before, that's not the case now. So they are shortening their hedge durations," said Naomi Fink, Japan strategist at Bank of Tokyo-Mitsubishi UFJ's global markets sales and trading division in Tokyo.

"It probably would have been more like up to six months. Whereas now, a lot more are hedging at three," Fink said. "So come next quarter, they'll have a whole lot more exposure to hedge."