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Emerging market sell off boosts company hedge demand

Companies with business units in emerging nations are stepping up measures to protect against foreign-exchange losses following declines in currencies from the rand to the rupee, according to UBS AG.

"Historically in emerging markets the behavior of the currency has tied in well with the behavior of the economy," Andrew Kaufmann, global head of foreign exchange solutions at UBS in London, said in a phone interview on Wednesday.

"The world’s a bit more nuanced now. Those clients who have the flexibility in their hedging policy to vary the hedging ratios are considering raising them or have done so already." 

Currencies of developing economies slid against the dollar last quarter as the prospect of the Federal Reserve announcing a withdrawal of monetary stimulus reduced the amount of cash available for pursuing higher-yielding assets.

The Indonesian rupiah tumbled 12% while India’s rupee and Turkey’s lira slid to record lows. South Africa’s rand declined 1.5%.

Unilever, the world’s second-largest consumer-goods maker, on September 30 blamed weakening currencies in Indonesia, Brazil, South Africa and India for a sales slowdown, following Adidas AG and Prada SpA in saying that the euro’s strength eroded profit.

"There are many corporates that have a current set-up, particularly with balance-sheet exposures, of not hedging," said UBS’s Kaufmann.

"For some of them, it’s a matter of re-evaluating the situation. It’s not an overnight change. It does take a while to adapt." – Bloomberg

 

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