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In an interesting twist of fate, currency bets are beginning to cripple the corporate sector. Apparently many corporations did not believe that the dollar would strengthen as much as it has. Yesterday, we learned that Citic Pacific lost more than $1.8B due to leveraged contracts on the Australian dollar and the Euro. Their contracts requires them to buy the AUD/USD for 87 cents and the Euro for 1.44. That is a more than 25 percent premium for the Aussie and a more than 10 percent for the Euro.
Unfortunately Citic Pacific is not alone in making these bets. According to the Wall Street Journal today, many Latin American companies have seen large currency related losses. The velocity of the dollar’s rally has given these companies little chance to exit out of their positions at good prices. Instead, they have been forced to take major losses.
I fully expect a similar trend for companies in other parts of the world including Asia.
Hopefully these companies will learn from the losses and start hedging their FX risk completely. To their credit, they did hedge but not enough.
Under the deals, the banks offered financing and currency trades at favorable rates. But there was a hitch. If the U.S. dollar strengthened beyond a certain threshold, then the companies would have to sell dollars at a loss. In some cases, the contracts had triggers that doubled the number of dollars the companies owed.
These companies should stick to their core business and try not to gain a few cents and potentially lose a few dollars by getting involved in the currency markets.