Corporates Prepare for FX Volatility by Changing Hedges

Corporate treasuries are actively changing their currency hedging strategies according to a new survey, with only 1% of the 250 senior figures polled planning to maintain their current policy, however there is a divergence in how they are changing.

Nearly half of corporate treasuries in the MillTechFX Q1 Corporate Hedging Monitor say they plan on lengthening their currency hedges ahead of a raft of political elections around the world – MillTechFX points out that more than 80 countries are set to head to the polls in 2024 – while 17% say they will reduce the length of their hedges. Likewise, while 21% plan to increase their hedge ratio, 39% plan to decrease it.

The survey, which was taken before the announcement of the UK General Election, also finds a divergence between UK and US corporates, with 20% of UK corporates planning to increase the hedge ratio (compared to 26% of US firms), while 14% of UK firms will decrease it (32% in the US). More UK corporates plan to increase their hedge length (52%), compared to 38% of their US peers, while 14% of UK firms will decrease hedge length, compared to 26% of US firms.

Currently, the vast majority of hedges are in the four-to-nine month time horizon, with 37% of all respondents hedging four-to-six months, while 45% hedge seven-to-nine months. Just 6% of firms hedge one-to-three months, while 11% hedge up to one year. The mean in months is seven months overall and for UK firms, while US firms are slightly shorter in their time horizon at an average of six months.

Excluding those who were, somewhat bizarrely “not sure” of their current hedge ratio, the average ratio of respondents was 51% (52% in the UK, 46% in the US).

Across the UK and US, geopolitics was the biggest external factor influencing hedging decision, albeit only just with 18% citing it. Interestingly, less US firms are concerned about geopolitics – something that probably reflects a large domestic business – in that centre, time and resources is the biggest factor at 20%, followed by central bank policy at 18%, then volatility and geopolitics at 16%.

In the UK, geopolitics features highest with 19% citing it, followed by credit availability at 16% and central bank policy at 15%. Inflation rates also register as an external influence, cited by 13% overall and in the UK, and by 14% in the US.

Eric Huttman, CEO of MillTechFX, observes that the data suggests the largest corporates (500+ employees) are the most risk averse in this current environment, implementing the longest hedge windows (7.5 months on average) and they have the highest ratio of respondents planning on increasing hedge ratios and lengths due to upcoming elections.