FX - Old and New

Bruce Krasting's picture


Note: Allow me some 'color', to make a point about the very rapid changes in FX that have taken place of late.


In the late 80's I was in touch with a few dozen US multinationals. The issue was foreign exchange risk, and what to do about it. What triggered my role were the big losses the companies kept taking.

Think of a big company in Ohio, one that had a nice business making "stuff" in Japan. They have a factory worth Yen 150b ($100m equivalent). The Treasurer worries about this balance sheet risk. He hedges it with a $100m forward short sale of Yen. At the end of the Q the Yen is up 10% against the $ and the Treasurer and the CFO meet:


CFO - How'd we do in FX?

Treasurer - Great! No gain or loss from the accounting exposure. We had a paper gain of $10m and a cash lost of $10m from the hedges.

CFO - What! You lost $10m of my precious cash to protect a paper gain? You're an idiot, and you're fired!


Then you had the company who on Jan 1 budgets a profit of STG 100m from the UK operation for the coming year ($200m notional value). That profit will be remitted back to the USA at the end of the year. Twelve months later:


CFO - Great news! I just heard from London, they made their number for the year, they booked a profit of STG 106M; ahead of plan!

Treasurer - Well, actually, from our perspective, we didn't do so good. The UK operation ended up way under what we expected. Sterling fell against the dollar, so the STG106m is only worth $170m today - the net is, we look like we're $30m short.

CFO - What! You didn't hedge a cash transaction that you knew was coming? You're an idiot, and you're fired!


I knew a bunch of the guys (it was all guys back then) who were getting yelled at and fired. So one day I got on a plane (say, Cincinnati) and had a few drinks, after work, with one of them.


Treasurer - I'm getting my ass kicked either way. What can I do?

BK - If I was you, I'd pass the buck to the 'big boys' upstairs. Take the heat off of you.

Treasurer - I'm loving that! How do we do it?

BK - Write up a policy on what gets hedged, when and how. Get a sign-off on the policy from the CFO, the CEO and even the Board. I'll help you write it up - you steer me some Biz.

Treasurer - Sweet! That puts FX management on auto policy! I just have to follow the rules. If things go wrong, the bosses will take the blame. The policy is my 'cover'.


Ohio is a pretty small place, and not so long after I got a call from Cleveland; another plane, more cocktails:


Treasurer - Heard you cooked up something with a pal of mine down in Cinci. I want one too. If I had a letter from you on bank stationary, about a few things on our FX policy, it would help me get it sold to the bosses.

BK - I'd by happy to do that. I'll have something on your desk by the end of the week. Now, about that bond deal you're doing....


In 2013 nearly all of the major companies in the world have a written policy on FX. A very high proportion of those policies have the things that I thought were important (for real and cosmetic reasons). The thinking behind the policies that were adopted:


A) We report quarterly, we manage FX quarterly.

B) We only hedge actually cash transactions that are upcoming and identifiable.

C) We can't sweat the small stuff. 5% changes in FX rates are okay. Above 5% we have automatic stabilizers that kick in. See D.

D) We will manage FX risk by changing both the pricing and sourcing of our products. We will do this on a quarterly and semi annual basis.

E) Hedging, using FX forward and futures contracts should only be considered after every opportunity under D has been exhausted.


My point (finally), is that there is a 3-6 month lag time in the multinational's reactions to changing exchange rates. If the FX needle moves by more than 5%, 'things' start to happen. Multinationals do not hedge cross border risk beyond six months, so when key FX rates move big, in a short period of time, the multinationals are forced to react in order to catch up with the market changes. Multinationals are always behind the curve, they are never in front of it.


Hello! In the past 6 months the Euro has climbed a very big 9.5% versus the dollar, a huge 26% versus the Yen, and a very important 6% versus the CNY. As I write, those "adjustments" are happening.


German Car Company

Bean counter - According the the optimization model, at today's FX rate we should be changing production. Increasing US, down in Germany.

COO - How big a change?

Bean counter - 2%.

COO - The dollar looks weak, make it 3%; we have to stay competitive. Maybe the Unions won't notice.....


French Solar Manufacturer

COO - We make a global product. Our biggest competitor is China. We lost 6% in production costs against them in just six months! The Americans, and now the damn Japanese, are going to kill us. Every panel we make, must now be sold at a loss. That, or we shut down.

CEO - Don't worry so much. Our friends in Paris will write us a check to cover the losses. After all, we have 2,000 people working in the plant.....


If the global economy were a four-legged stool, the legs would be the EU, USA, China, and Japan. As of January, 2013, the EU is by far the weakest leg of the stool. The EU also has the strongest currency, insuring a deflationary slowdown. Whatever your thinking was about Europe a few months ago, take down your expectations today. At EURUSD 1.3250 (and all the dollar based crosses) and EURYEN 119, the EU is going to take a big hit, soon.


The FX moves that are killing the EU are, in part, self inflicted. The strong Euro is an ECB/Draghi creation. The Euro price is also a function of the US/Japanese government policies to undermine the dollar/Yen. China, with its link to the dollar, is getting a free ride, a big boost, and, no doubt, a bit of a laugh.

If you try to sit on a four-legged stool that has one busted leg, you fall on your ass, look surprised or stupid, and maybe get hurt. I'm amazed that the "deciders" are engineering precisely that outcome.







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Cosimo de Medici's picture

I notice, as other have stated already, that you are getting hammered a lot recently.  I'm sure you know why.  The most vociferous of the members are all-in the Apocalypse Trade (AT), so any discussion of the world as it (still) is, and the world that must be faced every day by people who are working and not holed up in the storm shelter inventory-ing freeze dried turkey tetrazini, collating FMJ and hollow point ammo by caliber, and getting a woody over some shiny metals, is considered either superfluous or naive.  Three or four years on, however, "sooner-than-you-think" has most definitely turned into "longer-than-anyone-expected", and the AT crowd is getting increasingly frustrated.  They've been waiting for GODOT (Global Overthrow Deprivation Obliteration & Tribulation) to show up for too long.  Their frustration, at least some of it, gets directed your way.  There are, however, a whole slew of folks who are still required to consider such things as how to maximize gains and minimize damage from fiat fluctuations, others who like to trade, and still more who just enjoy staying informed.

It is to these latter groups you write, and they are appreciative.  As always, good stuff BK.

WhiteNight123129's picture

I will be buying your stocks when they trade at 7 times earnings, when you are screaming bloody murder about inflation and when TOTAL debt to GDP is at 150%. Today ~Too much debt to GDP ~ means the same things as `too many financial assets in relation to real assets`. Why? Debt = Asset of someone, circulation = today[s price * quantity of units. Price increase = commodity price increase. CPI is worthless, beause of reweighting it only measures wages, not prices. 

Long real assets (like Silver) short finanical assets (Treasuries for example). Easy. When the sheeple scream inflation finally and you see that on the front page and people running in circle with hair on fire, sell your Gold. Not there yet, will take years.  We need to breach the 10 years at 2.5% and then you will see armaggedon not before. You might say it is impossible to get there because the Fed prints. Ok fine, they can print I hold GOld. Boxed... teh Fed is boxed if everyone does that trade, the Treasuries and its friend USD are dead meat. 

Gold bugs, we need to colloborate here and short the treasuries. The treasuries going that is going the be the real fireworks on Gold and inflation and currency getting wacked...



oldman's picture

The euro will endure. But stay short, dudes----I'm sure you're right.

I hope you're right because that is when I move to Spain!  

I am cheering for the shorts, but the euro will endure                         om 

WhiteNight123129's picture

Buy the Euro at 1.05 against the dollar Sell it at 1.40, rinse repeat...


rufusbird's picture

Let me add my kudos. As I have stated before, I respect the fact that Bruce sticks around for the comments. The dialogue is what makes ZH. I never pass on one of his posts!


Eireann go Brach's picture

Classic stories Bruce! Keep em coming my friend!

WhiteNight123129's picture

Agreed, Shift your PM to EUROs...


Tinky's picture

Don't think I haven't noticed the improvement in quality of the (enlarged) graphics! Not as interesting as the anecdotes, but appreciated nonetheless.

Bruce Krasting's picture

Switched to Wordpress. Better graphics package with that. "Blogger" is a piece of crap. I had trouble all the time. Vapor-ware, weird shit.

Anyway, fuck Google, they wasted my time (a lot of it) with a bad product.

luna_man's picture



Yeah, you're probably right about "google" Bruce, but don't go burnin any bridges...


might be your only source soon

Bruce Krasting's picture

Oh, and of course I "listen".

Room 101's picture

Thanks for the post BK.  Yours are usually worth the read and I appreciate the fact that you don't post and dash, but respond to comments.  There are other posters where I'm tempted to leave a recipe so the thread won't be completely useless. 

prains's picture

always read your stuff BK, thanks for the stories

jldpc's picture

If BK is correct about the future of the Euro (down) and their problems are structural and cultural and they are more personally crooked than anyone else, not really financial it just plays out that way over time; then Dragi did not lower rates despite the need for same, because he knows that soon enough he/they will have to abandon strict austerity and turn on the presses = lower Euro - rising dollar. But against all the rest of the CBs out front of him time wise doing so, except ASO may not succeed as much as he hopes, the dollar may head up and oil down. So to devistate the Loonie, sell oil, sell oil, sell oil, sell oil, until they are bleeding and ready to shut down their stinking, polluting sands and tar pits. Not nice, but doable.

piceridu's picture

BK, as usual, great personal stories. The reason they are compelling is that they come off honest and introspective.

I for one appreciate reading your views and your take on today's machinations...especially as they compare to the days of free love.

Thank you once again.

OpenThePodBayDoorHAL's picture

Cool story Bruce love your work. But do you think the anecdote still applies today? Seems to me that investment flows now trump trade flows by a large margin. I live in Australia, where the currency hit $1.06 this week, on it's way to $1.20. I know it's a much smaller float but I think the point is still valid. As with everything these days, the flows from CBs, HFs, dark pools, shadow banks, SWFs etc "govern" everything

Bruce Krasting's picture

Yes, it still applies. Investment money always moves faster than the multinationals react (even way back then...). And yes again, the CBs dominate the money side of the equation today. It is the CBs that have created the strong Euro.

The micro effects, (car production/solar panels) are happening as a result. Nothing has changed in 30 years.....

Lokking4AnEdge's picture

Hey Bruce...

When are you going to write a book?

I'll be the first to buy a copy

Have a great weekend

azzhatter's picture

I will buy the second. Bruce you are a great story teller and have a knack for explaining things in a way people can understand. Thanks for another great stroy

bank guy in Brussels's picture

BK, regarding the 'colour' of your real-life war stories from the financial front in your past career, there is no need to hesitate

Your stories are typically very good and interesting reading

And for many of us with past careers in finance-stuff, it's pleasant recalling the days when business was a little more personal and human

Bruce Krasting's picture

Tks bank guy. Nicest words you've ever said to me. I'll take them to heart...



Then there was time back in 82'. My two biggest clients were the CB of Mexico, and one of the big car  companies out of Detroit. Talk about a conflict of interest. One day it came to a head, after I got a call from...........




There were four of at the meeting in Dayton, we knocked the cover off of the ball with the deal that was discussed. We're driving in a stretch back to Detroit to a catch the last plane to NYC. There is booze and ice, someone has a vial of coke to celebrate.

We're coming up to the airport and Steve (we called him "Little Stevie" as he was fresh from B school) says, "Yikes, I left my folder of papers in the conference room!"

The account manager, guy named Tye (of all things) who was running this show, freaks outs and asks, "The one that had the internal P/L numbers! You fucking idiot!" Driver! make u-turn now!

Me thinking we would end up in Detroit for the night, and what do in that fun town.......

Bruce Krasting's picture

So we hot-foot it back to Dayton, get the fucking papers (left right on the table - bad move by Lil Steve), head back to Detroit, check into the Marriot downtown. Later we go out Woodward, to a steak place and some drinks. After that it was back to the city, and a strip joint.

Tye chose the place (like he'd been there before), big neon sign on the outside flashing, Velvet. Maybe it was the name that drew Tye.

It was the usual show, but there was one standout. Girl with a size 48" set, name of April Chest (I don't think that was her real name). She brought the crowd to their feet.

A guy by the name Danny Robins, who everyone called "eggs" (I never knew why), was with us. Eggs was from Staten Island, and was as far from "Ivy" as one could get. Eggs was a Eurodollar swaps trader; these types tend to run on the wild side.

Eggs gave April some bucks, she sneaks up behind Little Stevie (who is now three sheets to the wind) and wraps her monster breasts clean around his head. Eggs takes a picture at just the right moment. Theres a pic of a 'suit' holding up a G&T, the head hidden by all the flesh.


Eggs sends the pic to the Yale Daily News, leaves a few photocopies in the inboxes of the hotties at work. Little Stevie left a month later, went to a second tier buy-side outfit up in Boston. Never heard from him since.

tom a taxpayer's picture

Detroit...Danny "eggs' Robins...Staten Island. Bruce, what do you know about Jimmy H's disappearance?

AssFire's picture


I agree with bank guy..

I have a nose for smelling bs stories and yours always read true to me.

I enjoy your contributions and always read them. Lately you have had some harsh critics;

ignore them and know you and your experiences are appreciated by many. Thanks for sharing.

Larry Dallas's picture


Long time, first time...

You're stuff is great. You should write a book like the one that was released when I was an analyst in IB. Monkey Business. Only deeper scars.


disabledvet's picture

we all blow hot and cold here. "playing to the crowd" is a losing proposition..."sticking to your knitting" is the only way. A good average in baseball is .300 and so it is in investing. Obviously the CEO's job is to get the winning percentage above .700 though...no mean feat. this is an expertise i am wholly unfamiliar with so its fun reading. obviously i'm a raging maniac bull so going on year four of this beauty "makes me want to branch out" in an learning sense. i've spent the last three years listening to the guys who do technical analysis and my take away from that experience is to "buy round numbers in bull markets." and this is a bull market...don't let that low volume fool you. the banks and financial houses have "in-house products" that can make your business a FORTUNE in markets like this...buy you'll never see it show up in a volume ticker. Interestingly we now have TWO expert FX guys here...which is rather interesting for site filled with preppers! "Good mindset if you're doing FX trading for a multinational bank"!!! (what was that guy's name...Kerviel? there's been like a dozen of them. "Oooops! Sorry...i just blew up Barings Brothers!") Anywho the risk controls on this stuff on Wall Street are the stuff of legend..."from whence we get the CDS and MBS" more than likely. The bottom line is "this is the time to take risk" and I'd be curious what are the most aggressive approaches to currency trading both Bruce and Marc would be selling right now. The dollar is going to remain weak because housing absolutely stinks and therefore the recovery will remain anemic for the forseeable future. Having said that gold is wilting so my first thought is "going after Loonie" (that would be the Canadian dollar folks) on some type of "bear raid" thingy. If i'm the new Citigroup Chairman and i want you to construct me the most aggressive trade possible to drive down the value of the Canadian dollar (needlessly in my view) what type of "structured product" would you advocate and what would it look like in execution? "I've got 100 billion riding on this trade so make it good."