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Steady solutions: how to navigate currency fluctuations

Global manufacturers can deploy deep local knowledge and working capital to hedge against FX volatility

*This partner content was produced by the Financial Times on behalf of Citi Commercial Bank

No successful company in history ever prospered without taking risks; juggling with potential jeopardy is a part of doing business. But lately, many leaders might agree that turbulent times are creating some of the thorniest challenges they’ve experienced to date. In a 2022 McKinsey report, executives responding to its annual Global Survey cited geopolitical conflict and inflation as the most pressing economic risks. Digging deeper into the data, supply chain challenges and currency fluctuation also loom large as ongoing concerns.

Currency fluctuation is a particularly acute problem associated with inflation. Simply put, when inflation increases, the money in the economy will tend to depreciate relative to other currencies – this influences how competitive an affected company can be, and creates potentially expensive headaches when it comes to sending and receiving international payments. One brand that’s familiar with the vagaries of foreign exchange is Tramontina, a Brazilian cookware, cutlery and home appliances company with 10,000 employees, which manufactures 22,000 items and exports to more than 120 countries. Citi Commercial Bank is a global partner of Tramontina and supports the company across continents.

“However, when you’re operating in regions like Latin America and Asia, currency fluctuations can be hard to predict. We can’t pass those costs onto customers whose prices we’ve locked in, so we may have to eat those losses for a while but clearly this is unsustainable” says Marcelo Borges, Tramontina’s US CEO

Hedging to address volatility

Businesses such as Tramontina often employ hedging strategies to protect against potential losses caused by adverse currency movements. These may include forward contracts, options and other financial instruments. A close monitoring of related influencing factors can also help anticipate forthcoming currency movements – looking at elements such as interest rate differentials, inflation rates, geopolitical events and government policies. 

However, this level of oversight requires specialist attention and analysis and, crucially, deep knowledge of local markets. Borges points to Argentina as one country where currency changes can be challenging:

“Only by working with an experienced bank, with a local presence and intimate understanding of the market, can we make the right decisions about product pricing and about buying the commodities to make those products” says Borges.

Tramontina’s key banking relationship is with Citi Commercial Bank. Citi has operated internationally for over 200 years, and that has been helping Tramontina navigate in different markets, from Canada to India. Timicka Anderson, Global Head of Consumer & Retail at Citi Commercial Bank, explains that local currency fluctuations can be managed in several ways. “First, we can provide local currency financing – working capital, so they can make payments in the local currency, thus avoiding the additional costs that would come from using money from outside that country,” she says. “We also help with short-term hedging and can use a number of proprietary tools – such as our Citi Velocity digital content, data and analytics platform – to provide a detailed analysis of potential risks across a number of markets in different regions.”

A global view for an interconnected analysis

Anderson points out that, for manufacturing companies such as Tramontina, it’s not simply Citi’s role to advise on currency challenges, but to look at the interplay of other factors, too. As a company that buys a lot of aluminium, for example, Tramontina must hedge not just its currencies but also its commodities costs. “Our global presence helps us take a macro view across all markets,” says Anderson. “In Tramontina’s case, it could be how aluminium has historically performed against the dollar.” 

As the US CEO of a company that’s been operating successfully for more than 100 years, Borges has some simple words of advice for those looking to expand internationally: “Play it safe.” He adds that Citi provides him with the sort of detailed local information that isn’t easy to access and which, together with the bank’s financial tools, allows Tramontina to make the most informed decisions possible – and mitigate risk.

“We play it safe every day,” he smiles. “Perhaps we don’t grow as quickly as some other companies because of this, but we are in very good shape.” Global commerce is, by its nature, an uncertain affair. But for Tramontina, by putting in place a well-devised risk strategy to address currency fluctuation and commodity costs, it shields itself from volatility and also seizes business opportunities – ensuring this century-old firm could still be supplying the world with products 100 years from now.

All opinions expressed by the participants in this article are their own and do not necessarily represent the opinions of Citi Commercial Bank

 

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