How Swiss Corporates Navigate a Strengthening Franc & Hedging Strategies

Speaker A: Welcome to currencycast. How should corporate treasures handle foreign exchange volatility in the context of shifting interest rate differentials? And how does trade policy uncertainty and uh, also geopolitical tensions impact forecasting accuracy? Welcome to Currencycast. My name is Austin McKinley. I'm the senior financial writer at ah, Cantox and your host in this episode. We have the pleasure to welcome Nino Bergman, Corporate rates and ethics derivative sales at BNP Paribas in Zurich. Nino Bergman, a warm welcome to you and thank you for joining us today on the show.

Speaker B: Thank you for having me today, Nino.

Speaker A: Can you start by introducing yourself to the audience?

Speaker B: Sure thing. As mentioned, uh, advice Swiss corporate clients on interest rate and foreign exchange risk management topics. I'm based uh, out of our Zurich office where I work closely with treasurers, CFOs across a wide range of companies. Our work covers everything from say, straightforward day to day hatching needs to highly tailored solutions for managing FX and interest rate exposures in uh, the context of e.g. m&A or capital markets transaction. So it's a pretty diverse and uh, dynamic setup, uh, I would say.

Speaker A: Yes, I can imagine that. And you're daily in contact with corporate treasurers and in touch with course all of the news of described to us a day in the life of a corporate race and ethics, derivative sales and BNP par. Reminders.

Speaker B: Yeah, well, first of all I'd say every day is different but of course there's some sort of a rhythm to it. So I usually kick off in the morning with a review of say overnight market moves and then macro headlines just to get a pulse on what might matter that day. And then from there on it's a mix of fly meetings, some of them well planned, others a bit more reactive, especially when markets are volatile. And of course a constant dealing with uh, curveballs appearing out of the blue as it's normally markets. So yeah, the job requires to stay on your toes and uh, that keeps things interesting.

Speaker A: That's right. I can imagine that one of the main sources of information, you know, regarding interest rate and currency market developments, um,

Speaker B: I'd say a combination of internal insights and external data providers. For me it's important to differentiate between tactical, say ad hoc and strategic information. So tactical news, there's things that move markets intraday need to be timely and reliable, whereas strategic insights are more about understanding macro trends, monetary policy trajectories and uh, structural shifts. So in both cases there's an overwhelming amount of data out there. The key is for us is filtering not just what's moving the market, but what's also relevant for our clients.

Speaker A: Yes. Now describe to us the main financial instruments that you use, especially in foreign exchange risk management. At Canto, for example, we only use forwards and swaps

Speaker B: generally a question which is very individual per client to be answered. Whereas our clients can access the full range of instruments to cover their hatching needs, our job is to educate clients on how to best use them. So this process not only starts when there's an imminent need to hatch a certain exposure, but such dialogue is often initiated as early as when clients are looking to formulate a hedging policy. I'd say choosing the right product or even a mix of it is super important for all Treasuries. What makes even more crucial for Swiss exporters and its treasurers is the constant appreciation of the Swiss franc being a, ah, safe haven currency as we all know, and its interest rate differential leading to heavily negative carrying. So I wouldn't say there's a best instrument across the board, but historically we've seen that clients who use a mix of instruments rather than only applying forwards often run more cost effective hatching programs. So that's especially true for Swissy buyers or Swiss franc buyers who added options like colors into the mix instead of relying 100% on forward.

Speaker A: Right, so you would say there's no one size fits. All right, let's discuss now the one as you mentioned, the roaring Swiss franc we've seen in recent months, especially in the month of April 2025, big appreciation of the Swiss franc and especially against the US dollar. And we had moves of um, more than 1% daily moves. Right. In some cases. What does a corporate FX sales, derivative sales do on um, on a day like that?

Speaker B: Yeah, well you said a highlight. I would say most Swiss exporters wouldn't exactly call it a highlight if the Swissie performs that positively on, on days like these. But yes, the Swiss franc clearly stood out and we've seen days where the Swiss even gained close to 4% against the US dollars, which is massive in terms of FX terms, it's not one big move, but it's consecutive big moves that we've seen in the, in the currency. When that happens, our job is simply to assess what's driving it. Is it a technical move which is driven by supply and demand, um, in the market, is it technical levels, is it a strike cliff, so to say, on options which will fade away or is it triggered by actual data so, or a geopolitical event and then ah, after all we have to Assess whether this is a temporary move that we're witnessing or whether it's a fundamental shift, which is, which is here to stay. For us, it's all about engaging with clients. Some will need to adjust their hatch ratios, others may need to rethink exposures. For us, it's key to stay proactive and not just be reactive upon client questions.

Speaker A: Right. I like that idea of assessing whether it's a temporary or a permanent move. Not an easy task, but absolutely a very important one. Nina, when assessing the reaction of Swiss companies to the roaring Swiss franc, does, uh, firm size and profitability levels, do these variables play a role? I read a recent paper from the Swiss national bank. According to which large firms, large and profitable firms tend to, to absorb most of those moves, uh, these exporting, uh, firms. Right. Is it, is it also something that you're seeing?

Speaker B: Well, we've certainly seen some change in client behavior, uh, over the last 10 years since the floor against the euro was lifted. We remember there was a peg almost against the, against the euros at 120 where the S and P somehow guaranteed that level. Um, the Swiss corporate landscape has become more resilient against an ever strengthening Swiss franc. Uh, this shows in how calm such clients remain, maybe have to remain even if we see such, uh, sharp moves. After all, hatching programs are designed to soften such blows. And in case of fundamental changes in the market, any adjustment to the hatching program has to be well thought through and very important in line with the client. Specific questions such as how my margins affect the beta. For how long do I have to commit to my prices or even will it impact my presence in a certain market, which is a very fundamental question that is being asked more and more often for Swiss exporters these days.

Speaker A: All right, I'd like to bring the conversation to a topic that is almost, that is implicit there, but let's do it. Uh, let's bring it in out in the open. Interest rates, interest rate differentials. The Swiss National national bank recently lowered interest rates, short term interest rates to zero. Right. And if you take one year forward, premiums or discounts, you. Well, we all know it's the Swiss franc trades at north of 4% in terms of an annual premium to the US dollar and uh, north of 2% to the euro. Let's debate a little bit with that. But first, how do firms react to the implicit high cost of hedging?

Speaker B: Yeah, when you say we cut to zero. The policy rate is at zero sorrow. Our overnight floating rate is already fixing below zero at minus four or five basis points. So we're back to negative rates territory. We have two years three year swap rates which are negative already. So it's a, it's a reality we have to deal with. And as you mentioned it's one of the biggest ongoing challenges for, for Swiss treasures. As for the continued adverse move in spot. The high hatching cost triggered by the Swiss is comparatively low interest rate and therefore expensive carry is a well known given for Swiss treasures. They've dealt with this in the past and have been dealing with this. Um, what does that mean? It means that hatching has no matter what the price tag attached to it. And when I say a price tag as you rightfully said, we're talking almost 5% per annum in negative carry against the dollars and more than 2, around 250% uh against the euros. So that leads to the very simple but not easy to answer question should I hedge at all? This question is often answered with a yes by the hedging policies. And uh, the following question is then how to hedge? Whereas our analysis clearly shows that the benefit of adding option based strategies in negative carry situations, that is Profit from not paying the carry in sideways trending markets, the vast majority of domestic Treasuries has not adapted its hedging programs to this. So if you ask me, in fact the fact that a lot of treasury is still predominantly use forwards boils down to the very typical twist behavior of going for the certain path which means rather paying a high price than a price which can be cheaper or even more expensive.

Speaker A: Right now, um, at Cantox for example we um, would take some pride in the fact that we use API connectivity to allow treasurers to delay hedge execution in the face of unfavorable forward quantum. There are other configurations for example in layered hedging programs where you would start with maybe a defensive approach uh, and move towards higher hedge ratios. The program evolves. But one additional question on interest rates, I think it's implicit in your response how the Swiss franc have Swiss compensation have become um, used to adapting to the high forward premium of the Swiss franc. But can, would you agree with the notion that to some extent also. Well, having a very strong currency also comes with a low cost of capital and that's at least some good news. Right? If you compare to for example Argentina now has a very strong currency and very high cost of capital which is of course completely unsustainable.

Speaker B: Well true, if you can choose, you would rather go for the very low rates than a hyperinflationary setup as we would see it in Argentina. And yes, the funding levels are more attractive. Um, two comments to that. I mean, when rates went negative the last time, we've seen that funding levels not necessarily moved in a parallel way, but the investor requested some additional premium. And the second thing I would say is if you hedge your future revenues that you generate abroad at a discount of 5% or premium, however you want to put it, any organic growth that you have in such a country is offset by a 5% hedging cost. So the question really boils down to should I still hedge? Is, is my revenue generated abroad? Is that still something I want to protect? Or rather leave it up to the free move in currency rate? There's a reason why Swiss corporates, even if they're not reporting on the US gaap, are mostly starting, um, their annual reports at constant currencies. Because that's the only way of showing whether one is actually organically grown or not.

Speaker A: That's right. And you know, let's take a broader view. We've, uh, discussed the situation in Switzerland, the Swiss franc interest rate. But now let's take a more general view of markets and risk management. You recently participated in, uh, a seminar series with BNP Paribas on the macro outlook. What points would you highlight if you were to participate in such a seminar again today?

Speaker B: Well, uh, when I spoke on the panel a year ago, the big focus was of course on inflation and how central banks were responding to it. Rates were climbing. Outlook was dominated by uncertainty around how far central banks, especially the Fed and ecb, would go. The Swiss national bank was also tightening, though in a more measured way. At that time, we expected interest rates to stay high for a while and we saw lots of FX volatility, especially in the US dollar remaining quite strong. And if we fast forward to today and picture has changed quite a bit, I would say, uh, inflation has come down and most major economies, central banks, are starting to shift gears. The S and P, shortly after that panel, uh, actually moved comparably early by starting the cutting flight cycle. That decision reflects not just falling inflation here in Switzerland, but also the ongoing strength of the Swiss franc, which puts downward pressure on prices for Swiss corporates, especially exporters. This new environment brings a different set of challenges. Yes, lower rates help with financing costs, as you said, but the stronger franc is becoming more of a headwind, uh, especially against the euro and that's putting pressure on margins competitiveness, uh, in key export markets where we are also seeing some new risks. Emerge. Global trade is becoming more fragmented with supply chain shifting and more protectionist policies. Overall geopolitical tensions remain high and that's certainly adding uh, uncertainty. And on top of that that there's more regulatory complexity especially around cross border compliance which is starting to affect how companies operate internationally. And all in all if you ask me like this, compared to last year the approach to risk management has evolved. A ah year ago it was more about protecting against sharp rate hikes and sudden FX moves whereas now it's about staying agile, rebalancing risks and opportunity, managing ethics exposures more dynamically and being ready to adjust strategies as the macro picture continues and continues to continuing with our

Speaker A: broader view on, well on your activity, what does foreign exchange risk management share in common with interest rate risk management and what would you say also sets them apart?

Speaker B: Well first of all I would say there's definitely a lot of overlap between, between managing foreign exchange uh, and interest rate risk. Both are about protecting a company's financial performance from market volatility. And both require a clear understanding of exposures, a solid risk policy and the discipline to stick to it even when the markets are noisy as uh, we've seen it in Swiss franc very often in the recent past. In both cases I, I would say it's about identifying the economic exposure, whether it's cash flows, whether it's balance sheet positions, whether it's uh, or long term competitiveness even in certain markets and then deciding on how much of that risk to hedge and for how long. We use similar tools, it's derivatives like forward swaps and options and we often run scenario analysis and stress testing across both. But there's also key differences when looking at the interest rate risk that is typically more predictable in terms of timing and impact. You usually know when your debt refinancings are due.

Speaker A: Focusability on your exposure, right?

Speaker B: Exactly, exactly. The focus is often on managing interest expenses and duration and the exposures are usually domestic or tied to a small number of currencies. That allows for more structured and long term planning. Usually I would say on the FX risk however, it's much more dynamic. It touches almost every part of a company. Sales cost, intercompany flows, even intercompany valuations. When you consolidate it's also more reactive to political events, trade policy sentiment. For Swiss corporates in particular, FX risk is a day to day concern. Because the frank is so strong and sensitive to global risk cycles, FX risk management has often become more flexible and responsive than interest rate management. So in short that I would say the toolkit is the same or similar at least, but FX tends to be more operational and fast moving, while interest rate risk is often more financial and of strategic nature.

Speaker A: Right, really interesting there. Um, you know, take us to, through the some of the implications of geopolitical risk in terms of corporate finance. Is it about what are the areas of impact? Is it about cash repatriation, funding, forecast visibility? And what's the role of treasury managers in particular? What would be the role of team like, like yours? Yeah.

Speaker B: I mean geopolitical risk has become a much more immediate concern for corporate finance teams in the last few years. It used to be more of a background factor, maybe a bit over exaggerating here, but now it's affecting day to day decisions, whether it's around funding, cash management or even forecasting. As you said, a few key areas that we see. First, funding geopolitical events like trade tensions, sanctions or even regional instability can impact access to capital markets fairly quickly. We've seen volatility in credit spreads, sudden shifts in investor appetite, even legal restrictions on who can lend or invest where, if I remember correctly. So for corporates with international operations, that can mean higher funding costs or reduced flexibility even in choosing where to raise capital. If we think about cash repatriation or liquidity planning in certain regions, geopolitical risks can lead to capital controls, currency inconvertibility, or sudden tax policy changes that can trap cash in local subsidiaries or make it more expensive to simply bring it home. And treasury treasuries need to be proactive, structuring intercompany loans, building buffers, planning around potential blockages. And then third, and that's maybe the most complex is simply forecast visibility. This is probably the biggest challenge we have. Geopolitical shocks, elections, war, sanctions, you name it, uh, we've seen it all in the recent past unfortunately, can change the economic outlook overnight and that makes it so hard to project revenues cost cash flows where the certain degree, degree of confidence that isn't appropriate, uh, a hedging strategy. And for Swiss exporters it might mean that sudden demand changes in key markets or abrupt currency moves, especially in safe haven scenarios where the franc strengthens sharply. In this environment, the role of treasury managers has simply expanded. It's no longer just about execution, it's about so scenario planning. It's about cross functional, uh, coordination and building, say financial resilience. Treasuries are becoming strategic hubs inside companies and this is where teams like ours can really add value. We help clients translate geopolitical developments into financial implications that might Mean stress testing ethics exposures under different achievements, geopolitical scenarios, advising on funding diversification or even reviewing hedging strategies to build, uh, building a bit more flexibility to be agile in these markets. So the goal is to make sure the company can stay agile and protect its financial position which stands above, above everything, even when the broader environment is unpredictable.

Speaker A: Right. Now you mentioned uh, stress testing scenarios and we do that a lot at cantos with our simulation tools. Let's just finish the topic on geopolitical tensions with maybe a more specific point, namely the changing phase of safe haven assets. People talk about a correlation breakdown. It's not more the US treasury bonds and the US dollar, but rather the um, instrument of choice in flight to safety episodes appears to be mostly the Swiss franc to some extent and to me, not very surprisingly, but maybe uh, a new factor, the Swedish krona and well, the Japanese yen also to some extent. Do you see that, do you see that sort of correlation breakdown as. And a new so emphasis on other safe haven assets?

Speaker B: Yeah, yeah, of course. We absolutely see that shift and it's something we've been talking about more and more with our clients. When you think back traditionally the dollars was the go to safe haven in times of geopolitical stress. But in recent flights to safety episodes, especially since around say 2022, we've seen a bit more and more nuanced picture, um, currencies like the Swiss franc, Japanese yen or as you said, Swedish Krona. Some cases have been the ones appreciating sharply, especially or particularly when the geopolitical risk is more regional or when it, and that's the other part, when it involves the US itself. For example, during episodes involving uh, US political instability, budget, uh, problems or even global conflicts with uncertain outcomes, we've seen Swiss yen and the Japanese yen outperform. So the promise is again, I just can, can always go back to the same point. For a Swiss corporate perspective, this is very relevant if you're exporting in euros, uh, and, and your basis in francs, then obviously geopolitical stress doesn't just mean watch the dollar, it often means the franc strengthens rapidly because the global investors see Switzerland as a safe and stable place to park capital. And that has a direct and immediate impact on revenues, margins and competitiveness. So he has this evolving behavior in safe haven flows. It's changing how we think about hedging policies. It's not about or just about expected FX trends, about the correlation between risk off events and VC appreciation. That means a hedging policy needs to account for stress scenarios explicitly, not just average market conditions. We're working more with clients to incorporate this into their haptic strategy. For example that um, might mean running scenario based hedge effectiveness tests, not just historical backtest that we're using as I said before, using option strategies to protect against tail risk events because tail risk events, not even sure whether we can call them tail risk events anymore because they, they happen. Revisiting hedge tenors and layering approaches to avoid being caught too exposed in high volatility periods and so on. I could go on forever really. Um, so the, in short the answer is yes. I mean this change in safe haven behavior is really and it does influence hedging decisions. It's another reason why a static catch ratio or a purely cost driven approach does not hold up anymore. Companies need a strategy that adapts to how the market reacts and not just how it's expected to.

Speaker A: Right. Well Nino, you said it uh, exactly the way we think about this. Uh, static approaches are now need to be revised as ah, markets and scenarios change in taking more of market based um, approaches to risk management in general. Nino Bergman Corporate rates and uh, FX derivative sales at BNP Paribas in Zurich. We've covered a lot of ground. We started this ah, show with well you presented your activities, the instruments that you use, the source of information that you rely on. We went on to discuss of course the Swiss franc, the roaring Swiss franc, its implications, the interest rate differentials between Swiss franc and um, most major currencies. And then we took a broader view. We went to the more of the global scenarios, macroeconomic and geopolitical scenarios. So indeed we did cover a lot of ground. Nino, is there something that you would like to add?

Speaker B: Well let's just wrap it up by probably saying that the road ahead will come with its fair share of challenges like ongoing interest rate shifts. We will see geopolitical uncertainty, we will see rapid technological change. But I actually see this as an opportunity for treasurers. By staying agile, using data smartly, keeping close alignment with the broader business, Treasury I think can play a key role in building resilience and even driving growth. So yes, it's a dynamic time but it's also an exciting one and especially those for the ones who are ready to adopt. I would say absolutely.

Speaker A: Nino Bergman, thanks a lot and well see you next time.

Speaker B: Thank you very much for having me.