As originally published through The Business Journals.
As a banker in First Horizon’s international department, John Gurney helps clients manage import and export payment risks and improve cash flow. He’s been in the industry for 30 years, but 2022 stood out to him as being remarkable for foreign exchange activity.
That’s because a confluence of events steered clients toward international business to seize upon opportunities and mitigate future risk. It resulted in new highs for imports and exports, according to the U.S. Chamber of Commerce. Exports of goods and services passed the $3 trillion mark for the first time, while imports reached nearly $4 trillion.
“I talked more with clients about foreign exchange in 2022 than in any other year,” said Gurney, Senior Vice President, sales for the Memphis-based bank. “There were a number of factors that allowed clients to take advantage of exchange rates and mitigate risk. While the environment is a little different in 2023, we expect clients to continue to be interested in importing and exporting because it’s an opportunity that’s accessible to businesses of all shapes and sizes.”
Gurney and his colleague, Lelia Savory, Senior Vice President, Product and Servicing Manager in First Horizon’s international department, recently discussed key foreign exchange topics investors and business owners should consider.
Impact of interest rate hikes, war in Ukraine and Covid
To ease inflation, the Federal Reserve has undertaken a series of interest rate hikes that began in March 2022. The European Central Bank wasn’t as quick to act; its first hike came in late July 2022. That delay, combined with the global economic uncertainty caused by the war in Ukraine, caused the dollar to strengthen against foreign currencies, making U.S. importing particularly appealing last year.
“By September of last year, the dollar was so strong, exchange rates were at 20-year lows against the euro, pound and yen,” Gurney said. “There also was a sense of volatility with the interest rate hikes and the war. It led to a lot of people inquiring about locking in exchange rates to mitigate future risk. We talked with many companies last year that had not actively hedged before. Hedging even a part of your position under conditions like this is a way to reduce risk.”
Another way clients are reducing risk is by making their supply chains less China-centric, both because of geopolitical tensions and lessons learned during the pandemic. That’s boosted a movement toward onshoring and near-shoring, establishing new relationships with vendors at home and in nearby countries like Mexico, Gurney said.
“These shifting dynamics could result in changing payment terms and currencies,” Gurney said. “A banking partner has the experience to spell out all the payment options available to a business when it starts a new vendor relationship, so risks are mitigated and there’s not a negative impact on cash flow.”
Easing the complexities of foreign exchange
International trade can seem daunting because of cultural, social, legal and economic differences and not knowing the best way to collect payments. At First Horizon, international services specialists work with clients to understand these differences and lock in competitive exchange rates as an important component of cash flow management. That allows funds to be received as soon as possible when completing overseas transactions.
These specialists also gauge each client’s risk level, risk tolerance and liquidity so a strategy can be created to help a business achieve its goals. Some of the services needed for international trade include:
- International wires – to send and receive payments in U.S. dollars and foreign currency securely and quickly.
- Foreign currency hedging – to protect a business against fluctuating exchange rates.
- Foreign check clearing – to get access to funds with a service that clears checks written in foreign currency or from foreign banks.
The bank also works with clients to provide commercial letters of credit and documentary collection services. Bankers also consult with clients to weigh the pros and cons of international trade payment options and provide information about international resources that can help them manage and grow their businesses.
“We have a team that reviews the transaction for documentary and risk compliance concerns and works to make the more complicated aspects of the process smoother for the client,” Savory said. “Our sales and operations teams work together – seamlessly and nimbly – to look at each client’s individual situation, explain how different international trade payment options can work for them and execute a plan that works within the client’s desired risk parameters.”
As clients make plans for international trade for the rest of 2023, the euro has bounced back, which makes exporting to the continent advantageous, Gurney said. While exchange rates fluctuate, what hasn’t changed over the past few years is that cash flow “is still king,” especially as treasury market liquidity continues to deteriorate amid the interest rate hikes.
“The right banking relationship will help a business interested in international trade understand the risks and cash flow implications of how various payment options keep the process as simple as possible,” Gurney said. “Businesses that worked with their banker to take advantage of where the rates were in 2022 realized that exposure to global markets can be both rewarding and profitable.”
