Is the World Selling America? Looking forward and looking back

Welcome to CorPay's FX in Focus, where we celebrate the ideas that contribute to the global payments industry. In this series, we invite thought leaders from around the world to share their perspectives on the challenges and the innovations that drive global business. Today, I'm sitting with Ed Kim, CorPay Cross Borders Regional Director for Currency Risk management solutions for a conversation on how to plan for your company's future when the ability to forecast is diminished and the world seems to be selling America.

Do you take steps to try to plan for unpredictable future volatility or would looking back at your trading patterns to date be a more effective way of examining your options? Hello, everyone. My name is Ed Kim. I am a regional director here at Corpay.

I've been in the FX markets now for probably over 20 years, working with corporates of all sizes, speaking to all parts of the balance sheet and all exposures. You know, we try to empower our clients by giving them full information, allowing them to hopefully make their FX decisions with conviction and confidence and as much clairvoyance as is doable, leading them at the end of the day to make optimal FX decisions given their internal mandates and exposures. But at the end of the day, we do encourage clients to be as fully informed as they can be and to implement an FX strategy that makes sense for them, with them knowing all of their options and alternative structures and strategies that may make sense for them.

What are the main considerations for companies looking to mitigate their FX exposures? So, you know, that's a great question. And headline news, exogenous events really grab attention for everybody. I know we'll talk about that in a minute, but in my experience, it's the everyday decisions that are made during more normalized market conditions that will ideally position a hedger to weather that storm.

So from a high level, I think clients that remain rational, remain calm, easier said than done, but ignore the noise, remove the fear and greed from their decision making process, tend to outperform. And in my experience and opinion, those that diversify their approach or their FX hedging solutions and products, they tend to outperform. At the end of the day, we want clients to be as indifferent as they can be when it comes to future FX moves. So whether the market moves 20% in their favor or 20% against them, as much indifference as you can achieve strongly implies you are effectively hedged.

In other words, if the market moves against you 20%, you feel indifferent because you feel adequately hedged. Conversely, if the market moves in your favor by 20%, you also feel relatively indifference because you feel like you are benefiting adequately. And theoretically, again, given client mandates and policies, one can only really achieve that by diversifying their portfolio. So in our terms, incorporating FX forwards, but also using other non-forward hedges or zero-cost hedges that do leave clients fully hedged, but keep them in a position to benefit should the currency move in their favor.

So, you know, once that portfolio is constructed, again, given individual client mandates and objectives, they tend to weather that storm. Now, will there be exogenous or tail events that are excessive, historically abnormal and stretch any portfolio? Yes. But a client with that diversified portfolio will outperform or do better than clients that tend to become complacent when markets are normalized or quiet and think that the market will continue in one direction in perpetuity.

Those decisions made under more normalized conditions or lack thereof tend to leave clients either under hedged or over hedged in times of duress. A major mistake I think clients make is under normal times, Euro was a great example. When Euro was at 105, buyers didn't want to buy. They thought it was going to go lower.

Now these buyers, a lot of them are in pain up here. Sellers, being worried that Euro would go back down to parity at 105, they overhedge down there. Now they're in pain because they're dramatically out of the money. you know so i guess you know again we don't want to be in the game of trading your exposure but you know it goes to like building that portfolio rationally but that's a good example of how and it happens all the time danielle it's it's remarkable to me like clients are buying at the top and selling at the bottom and you see it all the time and that's what we want to eliminate that's the fear and greed that you want to remove from your equation that's the ball game though Construct that portfolio under more rational market conditions and remove the fear and greed.

And hopefully that will allow you to weather any storm. But can the human element be avoided? Tariffs and or the threat of a trade war sparked by tariffs has reduced or eliminated companies' abilities to forecast confidently. No one knows what their supplies are going to cost No one knows what their status quo will be as it comes to their inventory or sales revenue You know when it comes to the tariffs again I think each exogenous or tail event poses its own unique set of challenges and questions for corporate end users Forecasting cash flow is a moving target to begin with.

So the tariffs that is really throw a wrench into all of it. So corporates literally, you know, not really knowing or being able to forecast what even their basic supplies will cost going forward and or what their sales will be going forward, I think has led, you know, a lot of corporates to sit on their hands, so to speak, and to dramatically cut back on their hedging because their forecasting ability has been materially diminished. So the question then becomes, how much should one hedge going forward?

Again, given the uncertainty around the forecasting, any forecasting model, and given the dollar's recent dramatic sell-off, from a point of entry perspective, does it make sense to hedge in or lock in these rather materially higher exchange rates for North American-based entities or North American functional companies? So it's kind of a two-pronged question, how much to hedge, given the uncertain forecasting ability vis-a-vis the tariffs, and should we hedge with the dollar being 10% to 15% weaker?

The second part is probably easier to answer. Working with a trusted FX partner may facilitate constructing that portfolio. If you are adequately hedged pre any exogenous event, theoretically, that portfolio should be able to absorb some or most shocks. whether, you know, regarding how much you should hedge.

Historically speaking, the only thing I think that makes sense is looking at a historical average. You know, what have been your historical flows going back a year, three years, five years, even 10 years? These tariffs is an anomaly. I think it is an outlier.

And the assumption is the economy should normalize at all levels, ebbs and flows, all economic inputs, outputs, et cetera. So if you can identify a reasonable conservative historical average of some sort in terms of what you have purchased in euros annually, quarterly, whatever metrics you can come up with, perhaps hedge a percentage of that. But until the uncertainty around the tariffs and how it will spill over into pricing works itself out, I think understandably so, it will somewhat, if not severely limit hedging decisions by corporate America.

I will say this, it's just the opinion of Ed, of myself here. Now that we've had a few months of tariff rhetoric, if you will, Trump tariff rhetoric being politically neutral, it somewhat feels like the market is discounting Trump's initial or the US policy initial initiatives in terms of slapping on a universal tariff, which initially moved the market dramatically. As it's kind of evolved and played out. I believe the market is significantly discounting any initial tariff announcements, with the rationale being it may be the starting point for the U.

S. administration to negotiate lower tariffs down the road. The market seems to be pricing in a 10 to 20 percent range in tariffs, which I think the market is somewhat accepting for now. As you can see in equity markets being at record highs, the bond, the yield curve being somewhat contained, the long end of the curve seems to be okay with what's going on with tariffs for now anyway.

So it seems like the market is slowly learning how to digest or discount these future tariffs. And it's generally by erring on the side of lesser tariffs than what the headlines may suggest. So in that case, where do you start as it comes to sifting through the noise, the lack of reliability as it comes to tariff announcements and the reaction of the markets to higher yields and higher US dollars? How do you move forward?

It seems like businesses may be trying to navigate conditions that are unfamiliar to them. Right. Great question. All I can say there is, and this is my observation of the market, not necessarily my opinion.

Historically speaking, the key macro driver in currency pairs in the long run, which implies sifting through the noise, what the key macro driver for these currency pairs are interest rate differentials. So in other words, rightfully so, all asset classes are very keen on what central banks will do. So markets very keen on what the US Fed is thinking, what the ECB is thinking, what the Bank of Canada is thinking. So just to clarify, higher yielding currencies vis-a-vis their central bank tend to be rewarded in the long run versus lower yielding currencies.

So as interest rates move on the U.S. side and or the Canadian side, for example, or the U.S.

side or the euro side, that tends to be the key driver in currency pairs. In the long run, there are shorter term gyrations and anomalies. But to answer your question, if the trend is, and it seems to be the at least driving or the main prevailing trend of thought, the U.S.

Fed, the bias is to cut rates, which is being debated, multiplied by the ECB not cutting rates. So if that's the forecast, and if the thought does play out where the Fed does cut rates some are pricing in 100 basis points over the next 12 months and the ECB stays put that interest rate differential will widen in favor of the euro So in theory that should lead to a higher euro dollar. Not suggesting that will happen, but to answer your question, to eliminate the noise and focus on the macro, all I can strongly suggest is that historically speaking, from an observational point of view, that interest rate differential has been the key macro driver.

Now, there are nuances that come into play, and I think this has been one of the more interesting developments or changes during this tariff cycle, if you will, historically speaking, under times of duress, whether it's recession, COVID, financial crises, you would see the dollar dramatically rally. The theory is, and it makes sense, it served as a safe haven currency. So under times of extreme duress, economic duress, massive fear, the global markets would turn to the US dollar for safe haven purposes, and you would see the dollar rally.

So to be clear, to clarify, historically, exogenous shock leads to massive uncertainty, leads to equity selling off dramatically and other risk assets. Those sell off dollar rallies. That has been reversed over the last three to six months, whereby when equities sold off dramatically, the dollar actually sold off, which I think caught a lot of people, I think surprised a lot of people because that historical correlation has seemingly broken, at least temporarily, whether it's permanent, I think the jury's still out.

So in other words, before this correlation was broken, one would assume or forecast with high confidence that through this tariff uncertainty, you'd see the dollar rally. But the opposite has happened. And so you've seen the dollar. A lot of headlines are coming out.

The weakest six months since 1973, et cetera, et cetera. So the question now has become the initial question is, has U.S. exceptionalism is outwaning?

To take it further, is the world selling U.S.? The theme that I'm reading about a lot is selling the U.S.

The tariff uncertainty. Has the world lost faith in the U.S.'s ability to grow their economy?

So that's what seems to be top of mind for most. It's been long overdue, in my humble opinion, but the elephant in the room is the U.S. debt, depending on who you, you know, $35, $36, $37 trillion is our credit card bill, so to speak, and our GDP, call it $25, $27 trillion a year.

So we owe more than what we make as a country, as seen in GDP. The concern there is servicing that debt. So the interest rate payments paid through the bond market apparently will be more than military spending and at some point possibly more than Social Security. So I think that's the main driver around selling America, the financial help of the country as a whole.

Now, raging debates about it, but I think that's the concern of the market right now. The percentage of revenue that needs to be allocated to servicing our $37 trillion debt. Throw on the big, beautiful bill that by all rights will add another two and a half to three trillion to that debt, I think is making the investor class nervous, which can have, they call it a debt trap or debt cycle. To service that debt via the bond market, if bondholders view the U.

S. debt to be more risky, they're going to require a higher yield to lend that money, which will only increase the cost of that $37 trillion debt. So without getting into interest rate theory, that seems to be the concern. Can the U.

S. service their debt and still adequately grow the economy? which may lead into a conversation around stagflation, which may not be the premise of this call, but all sorts of negative implications and consequences of what may happen should this deficit spending and deficit servicing play out. Well, I think the question that's going to be on people's minds, but businesses who are operating in this environment and in the spirit of keeping them fully informed, I think what we see as an FX provider, as you say, investors are nervous.

A lot of the time they find themselves in these kinds of scenarios to be either overhedged or underhedged. When the ability to forecast is diminished, in your opinion, what's the best practice solution? What do they do about it? Okay, that's again, that's probably the million dollar question in all of this.

Depending on, okay, so let's assume the forecasting, you know, one's forecasting model is less valid than before. The best practice in my experience has been gather as much historical data as you can as a company and derive some type of average annual foreign expenditure. The assumption there is, and obviously the longer the tenor of that data or the more data points that you can retrieve, historically speaking, as to how much you're spending to buy euros, to buy dollars, etc.

, the more valid that number should be. The assumption here is, so clients obviously hedge out three, six, nine, 12 months out. At some point when things normalize, your hedging ratios hopefully will remain somewhat in the realm of acceptable ratios. To that point, not necessarily here to sell Cambridge or Corpe, to that point, if you can hedge, if you can come up with a metric using historical metrics to derive some type of rational, notional amount that should apply in the future, therefore what you want to hedge, There are products out there that will allow you to hedge, but should that hedge amount be inaccurate materially, dramatically, and the client either needs more, much more, or actually needs much less, you can use, Corpay does offer something called an historical rate roll, also known as an HRR where clients can take that future product i a forward contract and extend it without realizing any losses So you can extend these forward contracts without a negative economic impact or negative impact on cash flow.

So you can do things like that to minimize the uncertainty of these future obligations. Long story short, the FX playbook is thick. There are many products and strategies and structures that can be used to minimize the uncertainty around these contracts. So, I mean, as you say, treasurers, CFOs at an individual company level aren't expected to wear all of these hats in addition to the other areas of expertise that they already have.

So they should actually look for an FX first management specialist that can help by having these same conversations that you and I are having right now. But to close out and just to give people a little perspective as it comes to future proofing, make a prediction for me as it comes to what the next six months might look like for them. So, look, that's a great question, you know, and here's my answer to that. In my humble opinion and observation, the currency market is almost certainly driven by macro fundamentals, obviously.

It's also driven by what we call technicals, in my opinion. So in other words, the fundamentals generally will determine which way a currency pair wants to go, and the technicals may suggest how it wants to get there. So my thought over the next six months is, I think the dollar will, it may weaken a little bit more, and the timeframe I'm thinking is three, six, nine months. And the fundamentals are obvious right now.

There is a bias for lower U.S. interest rates or U.S.

yields versus some of the other G7 countries. They're either going to sit tight or they may cut as well. There is a raging debate on this interest rate moves. I think the one thing, people want lower rates, generally speaking.

Everybody does. Lower mortgage rates, lower credit card bills, et cetera, et cetera. Lower rates generally equates to more robust economic behavior. Nobody wants higher rates.

It just adds costs to economic activity. Inflation is the key, I think is another elephant in the room that people generally don't like to talk about. The worst case scenario there is lower interest rates and higher inflation. you're talking about stagflation, which is a very less than ideal outcome.

But to answer your question, I'm going to resort to my technicals. The dollar index, it measures the value of the US dollar versus the G7 countries. It's a weighted average of the dollar value. All I can tell you there, observationally, is that it has been in a rather clear upward sloping trend going back 20 years.

So in other words, for the last 20 years, the general trend has been, you know, in a very measured way, the dollar index has been going from the bottom left-hand corner up to the top right-hand corner. And it's a rather obvious trend. We are presently testing, and again, according to my personal analysis, we are testing very significant historical support in that index, which would imply should the dollar continue to weaken, we may see a new trend in the dollar index on a long-term basis going back 20 years.

Based on that, so another way to look at it is it may take something more significant for the dollar to continue to sell off. I'm not saying that won't happen versus it taking something perhaps less significant for the dollar to hold, stay within that long-term trend. It's a cliche, but until proven otherwise, my thought is the dollar may hold present levels and may correct higher. That would be my thought.

The dollar should hold. It may weaken a little further, but I think it should, technically it should hold. And I'm not suggesting a dramatic leg higher for the dollar in terms of strength. But I think we hold, and I think for our euro buyers out there, a range of 112, 120 might sound reasonable.

I know that's a wide range, but given that we're at 117, 118 today, I think we are closer to the top in the short, medium term than not in euro dollar. And dollar cad, for those with exposure in dollar cad, it too is testing rather significant levels, suggesting that dollar cad should hold down here at 135, 136 and head back higher. I think the more relevant question is what kind of range should corporates consider going forward? That's the way I look at it.

Picking highs and lows is not a profitable game, a profitable venture in the long run. But if you can identify a reasonable range, I think that can make your hedging decisions a little bit easier. So I think the range in Eurodollar, look, we are at the upper end of shorter term levels, no doubt. But let's call it even a 115 to 120 range for the next three, six, nine months.

I think client corporates, if you work with that, you can make some reasonable decisions. And in dollar cat, I think the range 135 to 140 is reasonable. That's how I would play the next three, six, nine, 12 months. Thanks, Ed.

That brings us to the end of our episode for today. If you want to keep up with more news and views, make sure to subscribe wherever you're tuning in from. We'd love to hear your feedback and suggestions. So please email us at podcast at 4pay.

com. FX in Focus is a podcast written and produced by Corpe. The opinions expressed on FX in Focus are those of the speakers only and don't necessarily reflect the views of Corpe. This podcast is designed to provide general information and is not advice.