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Spring cleaning your financial risk policy?

Spring cleaning your financial risk policy?

Chris Towner Weekly bulletin March 2019
With the clocks going forward this coming weekend we can look forward to longer days. It is often during this time of year that households have a spring clean – a process that many are also applying to their businesses. Although Chatham’s main focus is on guiding funds and businesses on how best to hedge financial risk, recently we have seen an increase in requests for both FX and cash management policies.
Attractive cash terms

On the cash management side, given the low yield environment that funds and businesses have become accustomed to, a certain lethargy has arisen in the search for yield. However, it is worth noting that yields have increased since regulators put pressure on banks to strengthen their balance sheets after the credit crisis. This requires banks to hold sufficient high-quality liquid assets to cover their net cash outflows. As a result, there are some quite attractive yields for holding cash on a term deposit, especially beyond six months. A 50bps enhancement per annum on a £10m deposit is an extra £50k. So if your business or fund has the requirement to hold cash, there’s no time like the present to review yields.

As for FX policies, these can be relatively succinct documents that summarise the approach your business or fund takes to hedging currency risk. A policy not only formalises your approach and spreads the burden of responsibility from the finance team to the board, but is also a good way of demonstrating that your house is in good order. It is surprising how many finance teams still manage their FX risks without a formal policy.

Keep calm and carry on

While on the subject of cash yields and managing risk, the UK economy seems to have come to the conclusion that the best policy for dealing with the Brexit conundrum is to carry on as normal. This became quite clear last week with the release of the UK employment data. The unemployment rate at the last count in February fell to its lowest level since 1975 at 3.9%. Just to remind ourselves how long ago 1975 was, this was the year that Margaret Thatcher defeated Edward Heath in the Conservative Party leadership election to become the party’s first female leader.

Employment data is one of the most insightful health checks that an economy can have. It is also a fantastic measure for central banks to see how their monetary policy decisions are holding up. Central banks will be monitoring the tightness of the labour market as well as the inflationary pressures building via wage inflation. In the UK this is 3.4% and coincidentally the same level as in the US. The US is ahead of the curve in terms of tightening rates compared to the UK, although this week the FOMC declared that it expects no further rate hikes in 2019. As for the UK, the chances of a rate hike in 2019 as implied by the market are around 40%. That said, given the tightness in the labour market, should there be a “soft” resolution to Brexit then those chances will jump from a possibility to a probability. All the more reason to review those cash yields.

In terms of economic data, this week we have housing data from the UK with both mortgage approvals and Nationwide house prices for February. From the EU we have the German IFO business climate survey and employment data. In the US, we have the core PCE price index data, which is the FOMC’s preferred measure of inflation. And yes, we will get the odd update on the Brexit front!

For more information, please contact Chris Towner, Director at Chatham, at ctowner@chathamfinancial.com.


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