Corporate FX Hedging Slows in Q2: Survey

After the mayhem of March in FX markets, lower volatility led to UK and US corporates pulling back on their currency hedging after a period of increased activity.

According to the Q2 Corporate Hedging Monitor from MillTech, the average hedge ratio fell from 57% to 46%, the lowest level since the firm began tracking it in Q1 2024. Average hedge lengths also declined, falling from 6.62 months to 5.70 months and reaching a new series low.  

Almost half of firms are now hedging between 26% and 50% of their exposures, while the proportion hedging between 51% and 75% fell from 54% to 34%. This came after a Q1 report that found hedging levels at a record high, and while MillTech observes the findings suggest that corporates are adopting a more tactical approach, retaining greater flexibility rather than locking in higher levels of protection for longer periods, it could also be that many had their hedges on at the end of Q1 and could sit back.

The lower activity was particularly pronounced in the UK, where average hedge ratios declined from 58% to 45%, while hedge lengths fell by more than one and a half months to 5.35 months. The proportion of UK firms hedging for only one to three months quadrupled to 19%, while the share hedging for seven to nine months more than halved. US firms also reduced their cover, but less sharply, suggesting UK businesses have become especially reluctant to commit to protection further ahead, MillTech says.

Despite this pullback, MillTech says it is “encouraging” to see that losses from unhedged FX exposures fell significantly. While 88% of firms still reported a negative impact, average losses declined by more than a third, from approximately £909,000 in Q1 to £580,000 in Q2. The proportion of businesses losing at least £1 million also fell from 14% to 5%.

“This improvement should be viewed with some caution, however, as it coincided with lower hedge ratios and shorter tenors, meaning it cannot be explained by firms increasing their protection,” the firm states. “The timing of currency movements, changes in underlying exposures and other risk-management decisions may also have contributed. Nevertheless, average losses of more than half a million pounds per firm demonstrate that unmanaged FX exposure remains a significant threat to corporate balance sheets.”

There was a notable difference in outcomes for US and UK firms, with average losses among US respondents reaching approximately £687,000, compared with £418,000 in the UK. Only 5% of US firms experienced no impact, compared with almost a quarter of UK firms, while more than half of US respondents lost at least £500,000. “US corporates therefore appear to be carrying greater residual FX risk, despite maintaining slightly higher average hedge ratios and longer tenors than their UK peers,” MillTech states.

Unsurprisingly perhaps, central bank policy was the leading external factor influencing hedging decisions overall (17%), followed closely by volatility (16%). Central bank policy was the leading concern in the UK, while volatility ranked first in the US. This indicates that UK firms are focused more closely on the direction of monetary policy, whereas US businesses are placing greater emphasis on managing near-term market movements.

Looking ahead, 59% of firms expect central banks to increase rates, rising to 70% in the US (The Federal Reserve has just raised rates) but falling to 42% in the UK. A third of UK respondents expect rate cuts, compared with only 10% of US firms. If rates rise, US corporates say they are more likely to respond defensively, with 58% planning to increase their hedge ratios and almost half intending to shorten their tenors. UK firms are more divided, with similar proportions planning to extend and shorten the duration of their hedges.

“Overall, in Q2, corporates stepped back from the more defensive approach seen at the start of the year,” explains Eric Huttman, CEO of MillTech. “Shorter hedges and lower ratios may provide greater flexibility as firms wait for clearer policy signals, but record-low levels of protection leave less room for error if rate paths diverge further or currency volatility increases. With central banks themselves divided over their next moves, businesses will need to balance the value of flexibility against the certainty that a robust hedging programme can provide.”