The prevailing uncertainty in markets has certainly made 2009 a difficult year so far. With forecasts playing down the chances of a rapid upturn, issues of liquidity and volatility will continue to play major roles in markets over the coming months.
As a consequence, expert market analysis and specialist advice and support are absolutely crucial in navigating a way through these difficult times, particularly in the area of foreign exchange.
It was for this precise reason – to ensure that financial services businesses in Cayman had the opportunity to tap into global FX knowledge through a locally-based team – that Deutsche Bank launched its Treasury Desk.
With the current economic climate sparking an increased demand for locally accessible FX services, there is now a real opportunity for Cayman to expand its service offering and develop its expertise in the FX area.
Constantly evolving markets
The immediate economic future is particularly difficult to predict because circumstances cannot easily be compared to anything in the past. There are a number of key issues, however, that are central to this complex and constantly evolving situation.
The concept of ‘liquidity’ – the breakdown of lending between banks in the wholesale market as a result of the fear of bank failure – is particularly important. A lack of liquidity reduces the ability of banks to facilitate the leveraging that ordinarily allows global markets to function efficiently. Liquidity helps drive competitive pricing, which is particularly significant for FX. As a consequence of the withdrawal of liquidity, bid and offer spreads have widened across most markets.
Change in interest base rates is also an important factor, having a significant impact on deposits. The correlation between official rates set by central banks and wholesale market rates, from which client deposit rates are derived, has broken down. The target rates set by the central banks only manifest themselves in the very short end of the wholesale market yield curve, with the perceived credit risk of the quoting entity being a significant factor in determining rates for longer maturities. The relationship between official rates and market rates will only be restored as confidence in the banking sector returns.
In an attempt to ease the pain, governments around the world have reacted through the slashing of interest rates, the provision of additional liquidity in the form of ‘quantitative easing’ and the development of fiscal stimulus packages. It will take some time, however, before it is known whether such measures have had the desired effect.
With markets being so unpredictable and constantly evolving, it is essential to keep a watchful eye on and respond to changes in the economic environment. As a result, management of foreign exchange exposure is extremely pertinent in the current situation, with the behaviour of international money markets and exchange rates having the potential to significantly impact the strength of a business’ financial position. Engaging with a strong foreign exchange service provider can, therefore, be incredibly valuable for the financial structure of a business.
FX can play a vital role, for example, as businesses increasingly seek low risk strategies to protect revenues, whilst the analysis of money markets and the impact of current conditions on fiduciary deposits and investment management can be incredibly useful for businesses.
With Cayman’s financial services industry imbedded as it is in global money markets, businesses including financial intermediaries such as trust companies, fund administrators and external portfolio managers are realising the need to seek expertise to either protect their positions or take advantage of exchange rate movements.
Global solutions locally
By drawing on the latest technology and being able to tap into a global network of FX experts in locations as far flung as Singapore, London and Jersey, for the first time it is now possible for Cayman-based businesses to access a comprehensive FX service locally and price business the entire day.
It is also very important to make sure that an FX service available within Cayman is relevant, tailored and appropriate. With this in mind, an FX desk that is able to assess specific individual client needs and offer advice and solutions within the Cayman market place is particularly important.
Although FX business remains a hard one to break into, scale and an established set of relationships are absolutely key to it being a success. The benefits of such relationships include, for example, inviting senior FX and market experts to visit Cayman in order to talk face to face and share their knowledge with local financial services businesses on a regular basis.
With markets fluctuating constantly, building a proactive, trusting partnership with an FX provider, through a team of locally-based relationship managers, is undoubtedly the most effective way for businesses to ensure that they derive optimum benefit from a local FX service.
A two-way relationship is absolutely critical, with the FX provider making a commitment to completely understand the objectives and needs of its clients, and the client making an effort to work constructively with the FX provider to achieve the best outcome. This provides an opportunity to discuss in detail market trends, indications that any sort of recovery might be taking place and potential swings in currency relationships. In this way, a range of comprehensive, creative and tailored solutions can be quickly developed.
For Cayman financial intermediaries, having access to a local FX team who they can call on in this way can be a real comfort, with volatility, a key factor in FX decision-making, likely to remain high for the foreseeable future. Together with the fact that Cayman financial services businesses are unavoidably integrated into global markets, partnering with a locally accessible FX business has never been more important.
FX has emerged as one of the most dynamic activities in the financial markets over recent months, with persistent market volatility demanding an increased awareness of FX issues. Most major banks recognise the importance of FX as a core competency and demand for astute FX solutions has never been higher. It is therefore vital that Cayman establishes expertise in this area too – not just as a result of current volatility, but as a long-term business.
Whilst establishing a dedicated local FX team has been difficult in the past, technological advancements, improved access to global specialist networks and the development of a locally-based expert infrastructure, mean that Cayman now has the opportunity to establish itself as a centre for FX excellence – something that should give local businesses a great deal of reassurance.
Not only is this good news for local financial intermediaries looking for FX support in these difficult times, it also marks an important addition to the diversity of Cayman’s financial services landscape.