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Irish banks see pick-up in FX hedging as sterling rebounds
December 20, 2016 / 6:47 PM / a year ago

Irish banks see pick-up in FX hedging as sterling rebounds

* Exporters locking in more favourable rates into 2017

* Smaller operators remain reluctant to hedge

* Britain is Ireland’s largest single trade partner

By Padraic Halpin

DUBLIN, Dec 20 (Reuters) - Irish banks have seen exporters to Britain take advantage of the recent strengthening in sterling to increase their currency hedging and move away from converting money via spot trades, which had been on the rise since October.

Britain is euro zone member Ireland’s largest trade partner, so the plunge in sterling against the single currency following its June vote to leave the European Union had left exposed any Irish exporter not using forward or options contracts to protect themselves against currency shifts.

Those who hedge their currency exposure typically buy cover for three, six or nine months, the banks said. That meant some firms’ hedges had run down by October and they had to start switching some sterling into euros - though sterling was still almost 20 percent off pre-Brexit levels - to pay their bills at home.

The pound has since recovered and registered its best month in eight years in November to stand around 10 percent lower at 84.10 pence to the euro.

Allied Irish Banks (AIB), the country’s largest corporate and SME lender, said it recorded its strongest two months for sterling seller activity by volume in October and November, initially via spot trades.

“The spike came as early as October. Sterling sellers who had hedging in place prior to Brexit had to start selling, even at 90 pence, in order to fund working capital,” John Sheils, treasury manager at AIB, told Reuters.

“This month, with sterling back down below 85 pence, we’re seeing good flows and a bit more forward cover being taken out. There now seems to be more of an appetite to put some hedging in for 2017.”

Forwards and options contracts allow companies to exchange cash in future at a rate set today, or to be remunerated for disadvantageous moves in currencies in between times. They pay a small percentage for the privilege.

“A GODSEND”

Royal Bank of Scotland’s Irish unit Ulster Bank said it has seen a pick-up in enquiries from customers and more activity regarding specific pricing of hedges into 2017, including a number of new requests.

This has led to a gradual rise in executions of forward currency hedging for 2017 and into 2018, Stephen Masterson, Head of Corporate Banking, said in an emailed statement.

Bank of Ireland, the country’s largest lender by assets, said that like AIB it saw a spike in the weeks leading up to the referendum and that activity has increased again in the last three or four weeks.

“The move back down to 85 pence is a godsend for lots of people who might have been fretting when there was talk about parity (with the euro),” John Moclair, Bank of Ireland’s head of customer group, global markets, told Reuters.

Moclair said that compared with last year there was no marked change in the propensity of businesses to hedge, while AIB’s Sheils attributed the uptick to exporters who have previously hedged, suggesting smaller operators remain reluctant to take out cover.

A survey by the Irish Exporters Association in August showed that half its members did not plan to hedge following the Brexit vote despite the fact that a euro-sterling exchange rate at 0.80 to 0.85 or above impacted profitability for 65 percent of firms.

“My sense is that nothing has changed with smaller firms,” IEA Chief Executive Simon McKeever said. “It’s a serious issue with a sudden sharp risk always going to be to the upside.” (Editing by John Stonestreet and Hugh Lawson)

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