Since the end of May, the euro has appreciated by more than 6% against the American currency, to almost 1.16 dollars. While this movement could continue this summer according to economists, it has not, at this stage, led to a substantial increase in demand for hedging products from treasurers.

Where will the euro's appreciation against the dollar stop? Since mid-May, the single currency has jumped more than 6% against the greenback, rising over the period from 1.08 to almost 1.158 dollars. A level that it had not reached since October 2018. While many market operators anticipated, at the time of deconfinement, a stability of the parity around 1.10 dollars for 1 euro, several factors came to support the currency European Union: prospect of a massive community recovery plan in addition to national recovery plans which are themselves large-scale, rapid rebound in economic indicators on the Old Continent at the end of confinement, investors' fears about the economic impacts of numerous demonstrations against racism across the Atlantic...

The return of complex products

Benefiting from a strong euro, some importing companies sought to take advantage of this trend. "In recent weeks, several of our customers who buy in dollars have wanted to freeze conversion rates that have become much more favorable through the implementation of hedging products, confirms Pascale Moreau, global head of credit, interest rate and foreign exchange sales. for companies at Societe Generale CIB. Some of them, mainly SMEs, have even subscribed to structured products of the "accumulator" type which can offer, depending on the evolution of the parity, subsidized prices.

For this, the parity must move within a predefined range. However, a majority of importers seem to have remained wait-and-see in the face of the strengthening of the European currency. And for good reason: they do not currently face any need for additional coverage. Quite the contrary. “Most of our clients covered all or part of their planned flows for 2020 many months ago, says Serge Assouline, CEO of Forex Finance. As the crisis has caused the postponement or cancellation of many commercial contracts, many have found themselves over-hedged. As such, many cancellations or restructurings of foreign exchange products were carried out by French companies between March and May.

As for exporters, one would have thought that the recent appreciation of the euro would encourage them to protect themselves more, so as to avoid the erosion of their margins. But, there too, this hypothesis did not hold true. In addition to the deficit of transactions identified to be covered and situations of over-hedging, as with importers, another parameter militated for the status quo. “In response to the crisis, the Fed had lowered the range of its main key rate by one point last March, to bring it back between 0% and 0.25%, recalls Serge Assouline. As a result, the differential between euro rates and dollar rates has narrowed considerably.” Mechanically, this resulted in a decrease in the difference between the current euro-dollar rate (spot rate) and the rate at which a company can hedge forward - this difference is called "term points". “Just a year ago, when the euro was worth 1.10 dollars, a company was offered a rate of 1.14 dollars over a twelve-month horizon because of significantly higher American key rates,” says Serge Assouline. Currently, it is possible for them to obtain a rate of approximately 1.168 dollars for 1 euro in one year while the spot rate is around 1.158 dollars, ie a differential of "only" 100 term points. In this context, some treasurers prefer to wait to see if the bullish momentum of the euro continues before hedging. And if they have to do it in the short term, they know that the price they will benefit from in the long term will not be very far from the one they could freeze today because of the drop in the term points.

Little liquidity on the markets in August

In the opinion of market operators, only an amplification of the strengthening of the single currency could, in the medium term, lead exporters to change their strategy. “If the euro were to cross the threshold of 1.20 dollars, the situation would become more complex for them to manage,” warns Serge Assouline. But such a scenario seems believable. While almost all of the economists questioned by Option Finance expect a continuation of the upward trend (see table), the experts of Deutsche Bank and BNP Paribas see the parity registering at the end of the year at 1.20 respectively. dollar and 1.22 dollars for 1 euro. Some specialists do not exclude that such a target will be reached in the short term. “The European recovery plan adopted last week constitutes an undeniable support factor for the euro, not only in view of its size (750 billion euros), but also of its solidarity dimension (non-reimbursable subsidies to States, issuance of common debt...) which tends to strengthen the credibility of the European project, believes Louis Boisset, economist at BNP Paribas. At the same time, we are witnessing a deterioration in the health situation in the United States, which is likely to weaken the dollar. Provided that a second wave of coronavirus contamination does not sweep across Europe, this contrast could therefore cause significant fluctuations in the Forex from August. “At this time of year, the scarcity of liquidity on the foreign exchange market linked to the summer break can lead to sometimes violent movements,” recalls Pascale Moreau. This is a warning for treasurers on the eve of the departure of the holidays...

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By strengthening the budgetary room for maneuver of European states, the historic European recovery plan of 750 billion euros adopted last week constitutes, according to strategists, a support factor for the single currency.

Due to the postponement or cancellation of many commercial contracts, many companies that had implemented instruments to protect against exchange rate risk found themselves in a situation of over-hedging.

While it had risen to 13% at the start of confinement, the volatility of the euro-dollar parity has since fallen back to around 6.5%.

The differential between the current euro-dollar rate and the level at which it is possible to hedge over a twelve-month horizon now stands at around 100 points, ie four times less than a year ago.

Emerging currencies down sharply against the euro

• Since the start of the year, most currencies of emerging countries have depreciated sharply against the euro, mainly due to capital outflows from these countries caused by the health crisis (see table). "In order to secure their profits in the countries concerned, but also in view of the return of dividends from local subsidiaries, several of our corporate clients have wished to set up hedging products in recent weeks, says Pascale Moreau, at Societe Generale CIB. This type of operation mainly concerned Latin American currencies.”

(performance from January 1 to July 22)

Brazilian real: -23.8%

Mexican peso: -17.7%

Argentinian peso: -18.7%

Renminbi: -3.6%

Indian Rupee: -7.3%

Ruble: -15.2%

Turkish Lira: -15.9%

South African Rand: -17.5%