FX Risk Management in a Time of Crisis – Update

by David Irish | January 12, 2021

In April last year we published a special report on managing foreign exchange risk through the significant uncertainty surrounding the COVID-19 pandemic as well as the ratings downgrade. It is now time to look back over what has transpired in the past nine months and whether or not the approach we recommended then should be amended.

As a reminder the practical steps we recommended at the outset were:

Firstly, take out your foreign exchange policy and read it; thoroughly. And review the key factors and parameters that were analysed to determine the policy.  If you do not have a foreign exchange policy, put one in place urgently.

Secondly, consider whether you are managing foreign exchange risk as part of your holistic cash flow cycle or are you managing it on a standalone basis.  Your foreign exchange policy should be part and parcel of a robust treasury management policy that is created to optimise and protect the cash flows in your business.  If you do not have a treasury management policy, put one in place urgently.

Once we’ve summarised what’s happened in the markets over the last 9 months we’ll consider what we need to add to these recommendations.


The USDZAR has strengthened by 25% from its peak in April to end December after weakening by 27% in the first 3 months of 2020


The EURZAR has strengthened by 13% from its peak in April to end December after weakening by 24% in the first 3 months of 2020


The GBPZAR has strengthened by 15% from its peak in April to end December after weakening by 19% in the first 3 months of 2020
In summary the currency has completely reversed in direction such that the questions we now ask exporters and  importers have been completely reversed from those in our last report; as you’ll see later.

The key drivers of this reversal have included the following:

  • There has been a significant increase in global liquidity due to stimulatory actions by developed countries, both fiscal and monetary.
  • Optimism surrounding the speed of development and rollout of vaccines.
  • The outcome of the US presidential election which is expected to benefit developing nations.
  • The eventual signing of a Brexit agreement.
  • However, the above drivers have been tempered by concerns over new variants of the COVID 19 virus and recurrent outbreaks.

The volatility of the rand against our major trading partners over the past 9 months is reflected in the chart below. The left hand scale reflects the average daily variance in the USDZAR whilst the right hand scale reflects the historic 10 day standard deviation volatility measure. The volatility has clearly been at elevated levels throughout 2020 and will likely continue into 2021.

Based on the above, whilst the level of uncertainty is arguably less extreme than when we published our earlier report, we believe it is still far too elevated to risk your precious legacy on. No-one can predict what the future holds (not even in non-crisis periods).  Analysts are finding it extremely difficult to predict how long this crisis, or the impact thereof will last.

For example, in their 06 January 2021 FI and FX Insight publication, RMB expects that markets will “whipsaw” over the next 12 months, generally trading between R14.50 and R16.50 to the US dollar.

And so we need to look at the impact of these market uncertainties on your business and the impact this has on the decisions you are making. “Now is not the time to create more or new risks within your business

As before, let’s look at this in more detail:


Many exporters will be in a position where the current exchange rate is lower than the costing rate used to determine their foreign currency selling price.

As an exporter you may be tempted to believe that the rand surely cannot strengthen any further.  With sales and margins already under pressure the voice in your mind is telling you “Let’s take this risk, things can only improve from here”.

This may lead you to depart from your foreign exchange policy we put in place and remain more exposed than you currently are in the belief/hope that the rand will weaken by the time you receive payment from your customers.


Many importers will be sitting in a position where the current exchange rate is significantly lower than their costing rate used to determine their rand selling price

This could be viewed as providing a buffer that could be used as justification to take on more risk.  Almost like chips in hand that could be placed on the roulette table.  “I can afford to lose it so why not give myself a chance to double it.”  In our opinion this is the rationale that makes casinos rich.

And so, importers may be tempted to relax their foreign exchange policy parameters in order to benefit from possible further strengthening of the currency.

We realise that there will be some of you that will still want to take on more risk, regardless of whether this may reduce your returns or put your business under even more pressure.

BUT if you do want to follow this approach be sure that you have all the facts before making this decision:


Do you actually  know how much more strengthening of the currency you can endure?  Again, this can be a complicated calculation depending on your business and especially in a period of crisis.


Do you really know how many chips you have in hand?  This can be a complicated calculation depending on your business and especially in a period of crisis.
A full analysis of the impact on your business should include the evaluation of the impact on your trade flows, resultant cash flows and may require expert assistance.

With the unprecedented level of uncertainty in the world today is it not wiser to bank what you have in case you need it later?  No-one knows what is going to happen over the period of your cash cycle in the near to medium term.

Over the past 9 months, COVID-19 has also highlighted several weaknesses in the data and data gathering processes for managing foreign exchange risk by many businesses. A key cause for this has been the move to working remotely with the concomitant challenges of compiling the data needed to determine what their foreign exchange position is.

This has resulted in many decision-makers doubting the accuracy, timeliness and reliability of the forecasts and exposure reports received.

Key weaknesses that have been identified include:

  • Data being sourced from several systems requiring manual intervention and flawed spreadsheets
  • Systems being housed on an on-site server creating access challenges
  • Manual data capture from physical documents
  • Inefficient treasury or financial risk management systems. Many businesses use spreadsheets that are fraught with formula errors and opportunity for fraud.
  • Immature or informal hedging practices
  • An inability to analyse exposures timeously and measure hedging results

We have confirmed these revelations through the treasury and foreign exchange policies we have developed for clients over this period. Our development process is driven by the way the business operates and generates profits. This requires us to dive deep into the various sales and supply chain systems; how data is generated and pulled together for financial risk management purposes. We have identified far too many data errors; time consuming manual interventions; and static analysis and reporting spreadsheets.

These challenges can be largely addressed by automation. Despite the direct investment in time and money, these are far outweighed by the benefits of cost reduction, risk mitigation and identification of growth opportunities.

In order to support our clients in this  endeavour, our treasury management system (wautreasury) has been designed to integrate directly with the business’s operational and financial systems and be linked directly to all bank accounts so that the entire treasury process (banking, payments, cash flow forecasting and foreign exchange risk management and reporting) can be carried out in one secure place.

The pandemic has also created a whole lot of new opportunities for businesses. Some of these were already there but with the way technology has changed our connectedness, their existence became visible.

One of these has been the acceleration of e-commerce growth and the emergence of cross-border opportunities. This enhances the ability to grow market share but has also meant that new competitors have emerged. The challenge is that new and consistent pricing strategies need to be developed that incorporate a proper appreciation of the foreign exchange risks involved and adapting the foreign exchange risk management policy accordingly.

In conclusion, we believe that our recommendations in our earlier report continue to apply. You should be looking to reduce your specific uncertainty as far as possible during this time of crisis.

But remember, risk mitigation should not only be applied during periods of crisis, but rather on a consistent basis in order to enhance the sustainability of your business and its results.

We believe you should be focussing on what business decisions you should be making in the light of the state of flux in both economic and financial markets. And based on the key weaknesses and opportunities presented here; take this opportunity to seriously consider the automation of both your business and treasury processes.

In our previous report we provided key crisis management considerations adapted from an article by Naresh Aggarwal for the Association of Corporate Treasurers (UK). We highly recommend that you revisit these here.


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