By Saikat Chatterjee and Tommy Wilkes

LONDON (Reuters) – A boom in corporate dealmaking, surging input costs and a focus on short-term cash flows in the pandemic have sent companies rushing to hedge their currency exposures this year, giving a boost to banks that sell foreign exchange products.

Many companies are now attempting to reduce their currency exposures due to the pandemic. This caused revenues in 2020 to plummet before this year’s rebound.

Businesses should lock in prices as well due to persistent supply chain challenges and an increase in input and raw material costs, which are largely denominated mostly in U.S. dollar dollars.

Corporate demand for foreign currency is increasing due to a rise in mergers, acquisitions, and economic recovery. According to data from Refinitiv, global dealmaking has reached a new record, $3.9 trillion worth of transactions had already been completed by September 1.

Multinational corporations are among the ones that increased foreign currency (FX), market activity.

A corporate treasurer at one firm said its auditors had told the company to hedge its exposures more effectively and “ensure that we only hedge the visible stream of revenues”.

The result has been a rise in volume and smaller deals, something that is widely seen. Treasurers at large British companies claim the average deal size for hedging has dropped to $5 million-10 million from 20 million before the pandemic.

According to Naresh Aggarwal (political director, Association of Corporate Treasurers), “Corporate Hedging Activity has increased in recent months due (companies’) time horizons for hedge their FX exposures have shortened.”

REVENUE BOOST

It is proving a boon for banks’ currency trading desks, offsetting a recent drop in revenues from investor clients.

Financial market participants, such as asset managers and hedge funds saw their activity rise last year due to increased FX volatility. However, this year, the market is more calm so they are reducing trading.

The banks have been able to benefit from the increased activity of firms looking for ways to expand internationally, lend more money and hedge. JP Morgan, UBS and Deutsche Bank (DE:) are the top three banks by market share in the $6.6 trillion a day currency markets, according to a Euromoney survey.

The market-wide data for foreign exchange volume has some lag but most recent numbers point to an increase in corporate turnover.

According to Bank of England data, April saw an average of $117 billion per day of corporate activity in London’s foreign currency markets. This is 16.1% more than six months ago.

Data covering the trading at the biggest forex centre in the world showed that the growth in volumes of “non financial institutions”, a proxy for corporate activities, slightly exceeded market-wide growth by 15.6%.

Russell Lascala (global head FX Deutsche Bank) stated that FX revenue from its corporate clients was up substantially over 2019 and helped offset decreased investor trading. He declined to share numbers.

Bank profit margins have been squeezed by fierce competition from financial clients. However, businesses can be more stable and profitable than banks.

Lascala stated that Deutsche Bank is pricing companies more unusual, but profitable trades “almost daily.”

Lascala stated that corporations are increasing their business and need to hedge more. He also said Deutsche Bank was pricing unusual but more profitable trades for companies “almost daily.” He said that in previous crises, it was different. They were weaker and played defense.

Coalition Greenwich data shows that the global 12 top investment banks earned $28Billion in revenue from forex, commodities and bonds trading, an increase of 15% over the previous year. This was the bank’s largest first quarter in six years.

SMEs

Small and medium-sized enterprises (SMEs) have also ramped up FX trading.

Laurent Descout is the CEO of Neo Payments. He said that after an initial slow start, turnover was increasing for his cross border business.

Descout claimed that $1 billion had been cleared by August’s end, most of which was within the last months. Descout also stated that more complicated currency options were being abandoned in favor of simpler tools, such as forward contracts, and companies are now switching to “vanilla” products like forex option products.

Supply chain disruptions, rising inflation signs and uncertainties about the strength or otherwise of the recovery are likely to keep corporate FX volumes high.

Descout anticipates that treasurers will lock in FX rates over the next 12-24 months “to support medium-term cash flows and protect margins”