MFX 2011 Benchmark Analysis Report
Trends in the Costs of Hedging
Given the high degree of global volatility facing currency markets, MFX has seen the pricing of hedging increase significantly across several key markets in the last 6-12 months. We recently conducted an analysis of the costs of hedging for each currency in our portfolio (as well as commonly quoted currencies). We compared each currency’s current benchmark level to its historical low in the last year (September 2010-11). Here’s what we found:
African Rates
As expected, the largest increase in hedging costs has taken place in Africa, particularly East Africa where yields on domestic debt has moved off their lows as the region recovers from the 2008 crisis and central banks have tightened. Increases in food and fuel inflation throughout Africa have also had an impact on currency and rates in several key markets in the region. In terms of microfinance hedging activity, Kenyan Shilling (KES) and Ugandan Shilling (UGX) deals have lost their appeal, as MFIs have not yet adjusted to the new interest rate realities in their respective markets. On the other hand, MFX has seen a marked increase in demand for Ghanaian Shilling (GHS). This is due to the fact that Ghana has faced relatively stable inflation, resulting in interest rates that are currently the lowest they’ve been all year. Nigerian Naira (NGN) rates have skyrocketed this year due to heavy government borrowing, but Nigerian microfinance institutions appear to have a tolerance for a high interest rate environment.
- More expensive to hedge now: KES, TZS, NGN, UGX
- Stable or less expensive: XOF, ZAR, GHS, RWF
Asian Rates
Although, we have only hedged a few Asian currencies, three of these benchmarks are the lowest they’ve been all year. Demand for these currencies has remained relatively stable as a result. MFX has seen a particularly strong increase in demand for Cambodian Riel (KHR) as pricing has come down. Mongolian Tugrik (MNT) and Vietnamese Dong (VDN) rates have increased only slightly, but distortions in the local interest rate markets in these countries has made it difficult to close hedged deals.
- More expensive to hedge now: MNT, VDN
- Stable or less expensive: PHP, IDR, KHR
ECCA Rates
ECCA on the whole is more expensive, which has impacted demand from our clients. Armenian Dram (AMD) and Azeri Manat (AZN) have been the most dramatic movers—microfinance institutions in these countries have yet to adjust to higher interest rate environments. While Georgian Lari (GEL) rates are the lowest they’ve been all year, hedge pricing in this market is still seen as expensive when compared to the price of local funding.
- More expensive to hedge now: AZN, AMD, TJS
- Stable or less expensive: KZT, GEL
LatAm Rates
Latin America is mostly more expensive now, but with a few exceptions, not dramatically so. Dominican Peso (DOP) and Paraguayan Guarani (PYG) are dramatically higher now, having a strong negative impact on demand for these currencies. Peruvian Nuevo Sol (PEN) and Colombian Peso (COP) have increased slightly from their lows due to inflation pressure. But given the highly competitive nature of these markets, these small increases can make hedging somewhat more difficult.
- More expensive to hedge now: DOP, PYG, PEN, COP, UYU
- Stable or less expensive: MXN, BOB, HNL, NIO, GTQ,CRC
If you are interested in seeing the complete findings of our analysis, or to see our data sources, please contact us.