Market Moving Issues: Greece and the Swiss Franc
By Trevor Charsley, Senior Advisor, AFEX.
We’re proud to announce our recent partnership with AFEX, an overseas payments and risk management solutions specialist with over 30 years experience within the deliverable FX market. In more recent years, AFEX have been making strides within the fund and wealth management sector, using their portfolio of risk management solutions to protect investments that are exposed to the volatile FX market.
With Greece’s outlook continuing to loom over Europe’s economy and the unpegging of the Swiss Franc, we sat down with Trevor Charsley, a Senior Advisor at AFEX who has over 25 years experience to ask for his opinion on these market moving issues and how AFEX are working with their clients.
Whilst there is a lot of talk of contagion, how do you see this developing if we do see a Grexit or even Greece back in the fold with an incredibly generous restructure?
If we’re faced with a Grexit, then its safe to say the Eurozone is not likely to survive even in a post-Greece Europe. As more crisis starts to develop, (and it will) especially following elections, Euro volatility is likely to heighten leaving the Eurozone no option but to shrink further.
It could also be damaging for the Euro if Greece has a relatively quick recovery post Grexit leading other Nations like Spain and Ireland, to vote in similar anti austerity Governments therefore contributing to even more volatility for the Euro.
If we see a last minute deal for Greece without debt reduction, Greece will continue to limp along with it’s huge debt burden dragging it down. But if the restructuring is incredibly generous, there is also risk that other Sovereign States will once again think they deserve the same treatment as Greece and will vote in a left wing Government who can also threaten anti austerity in Europe to receive similar debt reduction.
This hasn’t gone unnoticed by the rest of the EU which is why a Grexit will most probably take place, leading the ECB to introduce more QE to try to ring-fence any negative sentiment from spreading into and unsettling the bond markets.
This ‘quick fix’ solution may not be sustainable in the longterm, with previous QE carried out by the Central Bank already contributing to the bond market’s erratic behaviour, which we’ve also witnessed since the reduction in the number of market makers due to new regulations. If a Grexit is to take place then we will likely see high volatility across all market sectors with the Euro/Dollar at risk of revisiting recent yearly lows and parity.
Have you seen a change in clients and their counterparties risk sentiment following the unpegging of the Swiss Franc in January?
The abandonment of the Swiss peg to the Euro was devastating to certain market participants, but this was not the root cause but simply the straw that broke the camel’s back. We really need to look at the credit valuation adjustment component of the Basel III rules to understand the beginning of the change.
The pressure on the banks to hold more capital against their own exposures was inevitably going to trickle downstream, you only need to look at the JP Morgan mini-prime situation that has recently hit the news to see what has been brewing. We’ve seen this affecting emerging fund managers for a number of years when they are looking for counterparties, a lot of the work we do is with fund formation specialists (advisors and lawyers) so that they understand that there is an alternative solution for FX liquidity that their clients can explore.
Typically, what type of products would a market participant use to mitigate such volatility risks and is it expensive?
The demographic of client in today’s market is ever changing, with some clients having a higher appetite for risk and others guarding against it at every opportunity. If a client wants to mitigate the risk, they have a number of strategies they can utilise.
In a market environment, where interest rate certainty and potential changes are void, short term forwards have been a favourite. Forward contracts provide certainty on price unlike structured products, which means mark to market and portfolio analysis is easy and efficient. On top of this, a forward contract which is then swapped at maturity and re-hedged can provide liquidity benefits too, releasing more capital into the fund, which of course is the most important thing for any investment fund.
There is a common misconception that hedging can be expensive and we spend an awful lot of our time educating and informing clients where the costs lie and the benefit of hedging risk around it. Whilst hedging is never free and there are indeed costs associated with it, a simple and effective strategy with great credit and variation terms can add significant value in improving IRR.
For more information please call the fund and institutional team on 0207 004 3945 or email firstname.lastname@example.org