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Saturday, 13th April 2024
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Dealer of the Year 2002 Back  
Finance asked the winner and runners-up in the annual Irish Association of Corporate Treasurers awards to give their insights on the events of the past year and to look into their crystal balls and predict what lies ahead in 2003.
Dealer of the Year’ Paul McEnroe, senior dealer at Bank of Ireland Treasury & International Banking.

Paul joined Bank of Ireland in November 1999, where he deals with the banks institutional and large multinational client base. Prior to that Paul spent over four years working with Ulster Bank Markets as a spot foreign exchange trader, including one year in the bond & derivatives unit and corporate desk. This is the first time Paul has won ‘Dealer of the Year’.

Look back at 2002

Many sectors of the global economy will not look back on 2002 with very fond memories, and the threat of global recession coupled with the geo-political uncertainty in the Middle East have cast a shadow upon all of the major economies of the world. We had hoped we would see strong leadership and policy, from both the Fed and the ECB over the course of the year, but in truth both have disappointed. The economic climate facing the corporate sector has worsened considerably over the past quarter, and many are now wondering whether this is a ‘double dip’ recession, or the hiccup that the collective monetary authorities would have us believe. With such a difficult landscape facing the corporate treasurer over the past twelve months, there has been a marked change in the way they have conducted their treasury business.

They say, ‘necessity is the mother of invention’. In the current climate of falling margins, reduced volumes and volatile markets, the corporate sector is becoming far more innovative in they way they manage their risks, and are finding themselves working much closer with their key relationship banks, to provide tailored risk solutions. For those that have embraced this change, the rewards have been tangible and have delivered much needed competitive advantage.

Looking forward to 2003

In looking forward to 2003, we must be wary that the global economy is even more delicately poised than at this time last year. Business sentiment has deteriorated, and with it, any hope of an imminent increase in capital expenditure. In 2002 it was the consumer that kept the global economy afloat, if this falters, a lack of demand is inevitable, resulting in increased unemployment, and ultimately, the threat of deflation will become more pronounced.

However, despite this rather gloomy picture, corporate treasurers have never been better equipped to handle such difficult and uncertain times. They have launched themselves up the learning curve of tailored and dynamic risk management and are now comfortable dealing in this market place. In addition, dealing spreads are becoming tighter and more transparent. There are undoubtedly tough and challenging times in prospect, but, armed with new tools and product knowledge, corporate treasurers can look forward to the New Year with quiet confidence.

‘Dealer of the Year’ 1st runner-up - John Moclair, head of FX sales at BNP Paribas.

John began his treasury career with ESB in 1987 and in the late 1980s he moved to FTI Finance where he worked as a treasury consultant and portfolio manager. During this period, he was responsible for developing and implementing foreign exchange and debt programmes for a number of Irish based corporates. He joined BNP in 1995, where the sales team concentrates on providing risk management solutions to Irish corporates and institutions. He has won the ‘Dealer of the Year’ award on 3 occasions.

Look back at 2002

Good calls last year? Last year, the market was expecting an economic recovery in the US in 2002. This was reflected in a strong USD and a yield curve that priced in rate hikes. Looking back at our comment in this magazine at the time, we felt that the market was too optimistic and that the recovery would be slow in coming. This view was vindicated as the USD weakened and interest rates were cut.

Looking forward to 2003

The jury is still out on whether the US economy is in recovery mode or not. What is becoming clear is that the Bush administration, with an eye on the 2004 Presidential Election, will not take chances and that they do whatever it takes to get the economy going again.

Initially, there is likely to be further tax cuts. If the budgetary situation continues to deteriorate and/or the economy responds to the medicine, there is likely to be a growing risk that the bond markets will become less sanguine over time.

On the currency front it is difficult to believe that the economic situation warrants a stronger euro on a sustained basis. Nevertheless, we believe, that in the first part of 2003 we are likely to see a weaker USD phase as the markets come to see this as part of the overall package of re-invigorating the US economy.

‘Dealer of the Year’ 2nd runner up - John Sheils, principal dealer, Bank of Ireland Treasury & International Banking.

John Sheils joined Bank of Ireland in July 1998, where he deals with the bank‚s large domestic corporates and manages the corporate resources book. This is his first year being nominated for the award.

Look back at 2002

‘If it were done when ‘tis done, then ‘twere well it were done quickly,’ Macbeth’s words of advice to the world’s central banks. 2002 could be characterised by the relative stability of the foreign exchange markets (with brief displays of USD weakness towards the latter half of the year), the false dawns of the equity markets and numerous opportunities presented to corporates to focus on their interest rate exposures.

Some of the world’s central banks appear to have followed Macbeth’s warning and taken a proactive view, while others appear to have lagged behind only to be forced to provide monetary easing later. Even though official rates sometimes appeared stubbornly fixed, yield curve movements provided good opportunities for proactive treasurers to look at prudently managing interest rate risk, traditionally the ignored risk. A lot of these products are of a zero cost nature and I would urge any treasurer who has not considered interest rate hedging thus far to do so immediately.

Looking forward to 2003

One of the most difficult jobs however is trying to predict what kind of a year we’ll be looking back on in January 2004. It is easy to look forward in the calendar and see events that are planned. 2003’s calendar includes events such as the opening of the NASDAQ Deutschland, new governors in the E.C.B. and M.P.C. with a possible successor emerging to replace Alan Greenspan in June 2004 (and hopefully Ireland securing a favourable group in the qualifying rounds of the 2006 World Cup - assuming we have a manager by that point!).

A US recovery seems almost assured so long as consumers are able to continue financing their current spending at life time low interest rates, investor confidence in the reforms in corporate governance returns and as perverse as it seems the war on terrorism continues, as there is nothing better for an economy as going to war.

Assuming oil prices remain stable, global economies could be back on track with world output set to rise to 4 per cent compared with 3 per cent in 2002, with the US set to gain most from this. This should see America return to its rightful place as the engine of global growth and provide much needed support to mainland Europe and Japan.
With none of the major economies having important elections scheduled in 2003 this should be a year without any major political upheaval. 2003 should however prove to be a historic year in the development of the E.U.

During the year it will move closer to admitting 10 new countries, while Sweden will have a long awaited poll on euro membership & Britain’s five tests on euro membership will be published with obvious implications for sterling.

Europe will also have to contend with negotiations on a European wide constitution and attempts to further liberalise the internal markets with movements expected in energy markets and towards a single market of financial services. These moves will pay dividends in years to come. However, if looking over the short term, the US would have to be the place to invest. These capital flows should provide a solid base for the USD, and following its brief dalliance with parity over the last number of weeks, I would expect the dollar to strengthen into 2003, giving incentive to importers to lock in their currency exposures now.

‘Dealer of the Year’ 3rd runner-up - Ricky Vaughan, head of large corporates, Ulster Bank.

This is Ricky’s second time making the short-list, after he came joint second runner up with Brian Kelleher of AIB in 2001.

Look back at 2002

2002 looks set to mark the third year in a row when equity markets will close at a level below where they opened. However, of the past three bear market years, 2002 is the one that will stand out in history. Corporate scandals rocked the confidence of the market place and ultimately impacted on every blue chip stock in the Dow Jones. Questionable accounting practices grossly over inflated the market, fuelling the irrational exuberance first mentioned by the Fed as long ago as 1996.

Yet despite the fact that cautious investors knew we were witnessing an asset price bubble, no action was taken to deflate that bubble, and ultimately it burst, taking with it investor’s faith in the market, at least in the short-term. Even now, by historical standards, US equities are trading at expensive price multiples, and the market has yet to rid itself of the excesses of the boom.

It was inevitable that the over-valued US dollar would suffer a correction in tandem with the US equity market, and it did dramatically, depreciating by almost 20 per cent against the euro. Yet the US continued to cut taxes and spend in an attempt to stave off recession in 2002, and its twin deficits (trade and budget) are now at historically high levels, pointing to further dollar weakness ahead. US interest rates meanwhile were cut only once in the year, to bring the Fed funds rate to a 41-year low of 1.25 per cent. Cheap funds enticed many to buy into US property or refinance their homes, which freed equity and led to stronger than anticipated consumer demand in the face of a downturn.

In the UK, the 2-speed economy became even more apparent, as manufacturing struggled with an appreciating pound and poor international demand. However, due to house price inflation reaching levels not seen since the late ‘80s, the Bank of England was unable to reduce interest rates to ease manufacturer’s suffering. Also with unemployment at 30-year lows, and interest rates unlikely to rise imminently, this scenario will likely persist. Meanwhile, 2002 saw no significant developments on the euro debate in the UK.

Closer to home, Europe ground to a standstill, restricted by the confines of the stability and growth pact, which never envisaged a global downturn when it was crafted. Yet despite a slide toward recession, Germany surprised with the re-election of Schroeder, who appeared to be the only beneficiary of the floods that hit Europe in mid-year.

Finally, it took eleven months for the European Central Bank to realise that inflation no longer ought to be their main concern, when they finally cut interest rates in an effort to stimulate growth in December. Nevertheless, this marked a positive change of policy emphasis.

Looking forward to 2003

Looking to 2003, one key event we know will impact the currency markets is scheduled to occur in June, when the UK Treasury announce whether or not it is time to hold a referendum in the UK on adopting the euro. To make this assessment, the Treasury have created five tests to determine whether or not the economies of the UK and the Eurozone are sufficiently convergent to cope with a common currency; but essentially the five tests can be condensed to 1 question: will the euro benefit the UK?

And your answer to this question very much depends on your perspective. It is widely believed in the market that Blair is a keen advocate of the single currency project, determined to stake his place in history by finally fully integrating the UK into Europe. However, it’s also thought that Chancellor Brown is currently against the project, jealously protective of the success his newly independent Bank of England have created. Will Blair risk a potentially humiliating referendum defeat, if he cannot count on the full support of his Chancellor? The market doesn’t think so.

Because the tests are by their nature highly subjective, it’s virtually impossible to give a fair, objective assessment of them. From a convergence/ divergence perspective, with UK rates remaining high and EU rates falling, you could say that the economies are moving apart. Yet recent data showing that the UK has just recorded it’s worst trade deficit ever clearly shows that the pound is too strong, and were it not for the inflated UK housing market, UK rates would also be falling.

Yet for now, the most likely outcome of the Treasury’s assessment is that the referendum will be postponed until the next parliament (2005). While this may cause some EUR/GBP weakness in the short-term, the euro’s anticipated rise against the US dollar should see it hold near current levels against GBP (0.64). And of course, should the tests surprisingly be passed, we could expect a quick euro appreciation to 0.67 (the forecast UK entry rate). Irrespective of the decision, current levels represent good value for GBP sellers.

With regard to other markets, the long awaited US growth recovery if and when it kicks in, will see the USD strengthen as corresponding gains in the US equity markets attracts money from overseas currently earning low interest returns. The dollar will be aided by the expectation of increases in US interest rates as the recovery gathers pace. When is this sustained growth situation going to happen? That, I do not know, but stay close to your friendly corporate FX dealer for further clues!

‘Dealer of the Year’ 4th runner-up - Brian Kelleher, senior dealer, AIB Treasury and International C&CT Ireland.

Brian has been a member of the AIB treasury team for the past 16 years. He previously won the ‘Dealer of the Year’ award in 1998 and 2000, and was 2nd runner-up last year.

Look back at 2002

At the start of the year markets were still feeling the after shocks of 9/11. This has been most evident through Bush’s personal crusade to oust Saddam Hussein by way of a concerted attack on Iraq. Markets generally were of the opinion that Bush should be more concerned about his own backyard, seen through the ever-increasing current account deficit. The Fed continued to cut rates to a record all-time low.

Greenspan’s thinking was to provide much needed growth stimuli into the ever-receding US economy. However, surprisingly the once perceived, ever dynamic US economy failed to respond and continued to slump. This weakness has been reflected in a reversal in the dollar’s value, which can be seen via the fact that the euro is now trading comfortably above parity, a level previously seen as a major psychological barrier.

Closer to home, there have been the interesting developments with the UK’s reluctance to join the EMU. As we await the five economic tests report, it is looking more and more like a battle of wills between Blair’s pro euro stance and Brown’s anti views. Whatever the outcome, any EMU rhetoric to date has been the major cause of volatility in this currency pair over the last year. With a low of EUR/GBP of .6081 at the start of the year, spiking to almost .6500, the EUR/GBP has now settled around a level at the .6400 mark. Of the three major economic blocks, the UK again has been the most conservative in terms of their reaction to the post 9/11 global slowdown by way of interest rate cuts by the Bank of England’s Monetary Policy Committee. This inaction has been equally dictated by inflationary concerns and housing prices to that of any fears of economic retraction.

Looking forward to 2003

From a corporate treasurer’s point of view, where to next for 2003? In terms of the US dollar, will Greenspan’s bold actions work? Will we see the economy bottom out? Historically, the equity markets are the lead indicators of future economic fortunes. Watching the US stock markets will provide us with our best prediction.
If recent correlations continue and Greenspan works his wonder once more, we could perhaps see a cap in the euro’s appreciation. A pending war with Iraq may dent this view but the market would’ve factored this in to a certain extent already.

Hence, the dollar’s fortunes may turn. For those with dollar-based imports perhaps now is a pristine time to hedge, whether it be 100 per cent or part of your exposure.

Interestingly, the ECB have followed the Fed’s move somewhat to a lesser extent, by recently cutting interest rates by 50 basis points. With the yield curve as flat as it is for those with term borrowing perhaps it could well be worth entering into an interest rate-hedging product such as a fixed loan or an interest rate swap.

In terms of the UK EMU debate, it is widely believed that a public referendum will happen, within the current parliament. Could this be the year for it? Certainly, the polls are showing a strong ‘anti’ feeling amongst the UK public. All these factors will ensure continuing volatility. Analysis of one’s exposure to this currency and how best to hedge for all eventualities should be conducted by corporate treasurers.

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