European exporters pay for FX swap exposures

摘要

The cost of default protection on European exporters rose sharply in recent days, as a knock-on effect of FX hedging confounded expectations that European Central Bank quantitative easing would benefit the companies through a weaker currency. German auto makers such as Volkswagen and aerospace credits including EADS, which logically should have been beneficiaries of a weaker euro (and a lower oil price), saw their spreads widen sharply or hold steady, as the broader market rallied on expectations that ECB bond buying would flow through to stronger demand for corporate debt. The counter-intuitive moves have their source in the FX derivatives market, where exporters have boosted their hedges to counter rising volatility. The euro has declined 6% against the dollar year-to-date and nearly 17% over the past year, while at-the-money three-month implied volatility on EUR/USD was recently at 12%, compared with 5% in the middle of last year. The rise in hedging has had a knock-on effect on dealers, which have turned to the CDS market to offset their FX swap exposures, bankers said. The most common trade has been to buy protection on names with the biggest currency hedging programmes, which has pushed CDS spreads in those companies wider.