Managing currency uncertainty in your buying decision
- Summary:
- Currency uncertainty and the precarious state of the Euro make buying decisions more difficult today than in the past. Hedging strategies are needed. How?
It's that time of year folks when big buying decisions are coming down to the wire. Right now I am getting plenty of inbound on final negotiating tactics for the deals that will close out in the calendar year and while the usual discounting and terms games are alive and well, currency uncertainty figures large in the minds of those who are committing to the next one to three years on SaaS projects.
If you'd told me at the beginning of 2016 that the Chinese would pull back from US bond investment, Brexit would be a reality, that Trump would be US president elect and that Italy would strike down a referendum on much needed constitutional reform I would have called you nuts.
Sudden impact?
But then it's been a pretty nutty year with extraordinary volatility in currency markets yet counter intuitive upward reactions by the major stock markets. the former is understandable, the latter look like the triumph of hope over reality. In short, there is plenty of volatility in the system which means uncertainty for buyers. How has this worked out for major vendors?
Earlier in the year we saw Brexit blamed for the sudden shut down of an important Infosys project. SAP seemingly got past Brexit OK in the early stages, Salesforce navigated Brexit well while Workday's stock price took a beating when CEO Aneel Bhusri made the honest point that uncertainty over Brexit hit some deals.
Show me the money
So far so good you might think given how the Euro has traded since 2012 (see image at top of screen.) Not really. While volatility and uncertainty are inevitable parts of any financial market, the Euro in particular is bumping along at around $1.04. Some commenters believe this is an important psychological barrier that presages the end of the Euro experiment. Speculators want to know how much lower the Euro can go.
The FT says that over the last year, investors have weathered the shocks but notes that:
‘’The transition period over the next few months could be dicey for markets, as there is a lot of good news priced in,’’ said John Briggs, head of strategy for the Americas at NatWest Markets. “We think the market is not paying enough attention to the strength of the dollar and there is a chance that this weighs on the economy in the near term.’’
For the Eurozone, the FT says:
There are also signs some investors in the eurozone are preparing for the worst, even the distant prospect of a break-up of the single currency. The money the ECB pumps into the eurozone is becoming concentrated in just four countries: Germany, the Netherlands, Luxembourg and Finland.
One country missing from the list of havens is France, with many investors clearly worried about the country’s presidential election next year.
From my soundings and from published accounts, most vendors say very little about France, Spain, Greece and Italy. But they are active in investing in the northern European countries like Germany and the Netherlands and of course the UK, often the largest English speaking market outside the US.
German contagion?
Germany is problematic largely because there is a very real danger that Deutsche Bank will have to be bailed out in some way. Already facing a massive fine of $14 billion over bad lending practices in the lead up to the financial crisis of 2008, DBK is also overly leveraged and considered the riskiest bank in the world. Regardless, DBK continues to bump along.
If a bailout occurs then you can be 100% sure that the EU rules on how this works in practice will get a dose of nifty rewriting. Why? I can't see anyway that Germany is prepared to take on a massive dose of austerity at a time when its citizens have been paying for reunification the last 20 plus years. And austerity is really the only lever that EU governments have available to them in these circumstances.
What if DBK fails altogether? The merchants of doom have been peddling that story on and off for years and it hasn't happened - yet. Even so, make no mistake, DBK, while it has deleveraged massively has a long way to go and if it does fail then all bets are off as to what that means for the global banking system.
Trim your hedge
Cheerful isn't it? It does get better. As you're trying to nail down your SaaS contracts and especially the COL price index ratchet, you can at least draw comfort from the fact that inflation will continue to run at near zero the next few years. Or at least that's how it looks until you realize that the US Fed just hiked interest rates as a way of doing what? Dampening near non existent inflation.
That hike won't impact those who took on large tranches of long term debt at near zero coupon rates. But further planned rate rises will put pressure on currencies at a time when the USD is strengthening anyway.
In some cases, it may be possible to push the currency hedge over to the vendor. We know for instance that SAP has a policy of pricing locally. The advice is simple - do your deals locally but ensure they are consistent.
US vendors prefer to price in USD. That's a problem unless you're in an economy that's thriving and where you can absorb any cost increase from outsize profits or from a drop in your energy consumption costs.
Savvy buyers will at least try and lock in a fixed price across all elements of the contract for the next three years. That way, you can hedge the currency issue either now or at the first signs of further trouble.
It would be unwise to leave this off the table as a discussion point because unless a miracle occurs or a friendly Black Swan turns up, the Euro is going to continue looking like a basket case at best an a zombie currency at worst.