Gabriel Lombenzo, Head of Currency Sales Desk and Currency Products at Itau Unibanco, talks about volatility in emerging markets.
Global Finance: How is a stronger US dollar and increased volatility reflected in business customer demand?
Gabriel Lomvenzo: It is important to note that our corporate clients are prepared to face volatility in the foreign exchange market. Many companies implement hedging strategies to protect their trades from foreign exchange fluctuations. [FX]. These strategies may include the use of futures, swaps, and options contracts to set exchange rates and reduce the risk of economic loss. Overall, our currency risk management specialists have noticed an increase in client demand for our expertise to help them understand and manage these risks.
GF: How do the expectations and demands of clients seeking to invest in emerging markets differ from those of clients seeking developed markets?
Ron Benso: Emerging markets have higher interest rates. These interest rates attract investors seeking carry trade strategies, believing in the benefits that arise from the difference in interest rates between emerging and developed countries. If developed markets begin to raise interest rates, migration to these countries may occur and emerging market currencies may depreciate, wiping out the gains from this strategy of exploiting interest rate differentials. As a result, these investors are increasing their demand for strong currency hedging in emerging markets to protect themselves. Tolerance for negative rumors also decreases, making these currencies more volatile.
GF: How are increasing geopolitical tensions around the world impacting your clients’ currency concerns?
Ron Benso: In addition to the fluctuations observed in the macroeconomic context, 2023 was also strongly influenced by geopolitical tensions. This background has brought further volatility to the market and customers have had to take more care to monitor what is happening with prices and protect themselves through the mechanisms we have just described.
These tensions also make us more wary of international sanctions. Countries, products and trading partners are restricted overnight, directly impacting a company’s commercial and financial operations. In this context, we have noticed an increase in the use of guarantees such as letters of credit in foreign exchange transactions. This tool effectively reduced the risks associated with trading performance and ensured security in international transactions.
GF: Does the bank face an increased need to adapt to the demands of commodity producers, especially against the backdrop of this year’s volatile situation?
Ron Benso: Volatility is inherent in the agribusiness market and therefore it is already part of the client’s daily life. However, we understand the importance of managing risk to increase the predictability of outcomes and ensure long-term business continuity. To achieve this objective, we offer a dedicated agribusiness team that provides specialized services in foreign exchange management. This portfolio of expertise and solutions is a key tool to assist clients in this situation.
GF: What steps has Itau Unibanco taken to stay ahead of its competitors?
Ron Benso: Itau Unibanco has been working on four main fronts to maintain its leading position. The first is a design-at-scale and client-centric culture that involves building structures around the client experience, defining policies, disseminating good practices, and effectively participating in product development. The second is the integration of data and artificial intelligence. [AI] Our work incorporates activities and development methodologies to popularize so-called data culture, which uses generated data to make better decisions.
Third, we have a unique methodology for developing products in a community model, using multidisciplinary teams from technology, operations, client experience, and product to work on a common goal. last, [implementing] Technology focused on system modernization, creating scalability and agility in solution development and quickly resolving outages and incidents.
GF: Where does AI fit into the global FX market?
Ron Benso: We believe that the use of AI will be transformative and bring significant changes to the market. We are testing hundreds of artificial intelligence initiatives focused on internal processes and customer service.
In the FX context, we see great potential for AI to make operations more efficient and increasingly agile by eliminating or optimizing processes. We are also providing better support to our clients. Our strategy focuses on value creation for our clients and business sustainability and competitiveness in both the short and long term.