US Corporates Increase FX Hedging: Survey

Just weeks after its Q2 Corporate FX Hedging Monitor found that political uncertainty was driving corporate FX hedging decisions, MillTech FX has published another survey, its 2024 Corporate CFO FX Report, which reports that while treasuries are planning on increasing hedging activity and hedge length, the actual findings for 2024 indicate a decline in both from 2023.

In the latest report, 86% of North American corporates are planning on increasing their FX hedging activity, in spite of 73% noting increased hedging costs – which normally come with increased volatility as seen in recent months. The survey also finds that 66% intend to increase hedge length, while 29% plan on increasing hedge ratios. The report last month had already flagged the increase in hedge length, it also reported that US treasuries had increased their hedge ratios by 2% in Q2. Last month’s report interviewed 250 UK and US corporates, the latest also cites a survey of 250 executives.

In an irony that will not be lost on traders given the ground the dollar has given up in recent months, the report notes that the “strong dollar has put corporates on high alert”, with 93% reporting such an event weakens their company’s competitive position in international markets. The survey was taken in July and 92.4% of respondents also said they expected the dollar to continue strengthening in the year ahead – presumably they are a lot happier today.

There was a rise from 2023 of just under 1.5% in those who said they hedge forecastable currency risk, it now sits at 82%, while only 51.1% said there were now considering hedging given market conditions, compared to 69.4% in the 2023 survey. Those who are not considering hedging said it was because the capital was better deployed elsewhere (46.7%), too expensive and they had insufficient credit lines (both cited by 33.3%); they had minimal exposure (26.7%) or they had a “burdensome” hedging structure (20%).

Just under 73% said the cost of hedging had gone up, this is actually a decline from 74.6% in 2023, while 26.8% said it had not, up from 16.3%. Thankfully, after last year’s finding that just over 9% didn’t know, (or, in fairness, that it had stayed the same) also dropped to just 0.4%.

The majority of respondents hedge between 26 and 75% of their currency risk, with 52.7 hedging four-to-six months out, just under 23% one-to-three months out and 19% seven-to-nine months. The mean hedge ratio of 49% is down from 60% in 2023, while the mean tenor was 5.05 months from 5.53 months.

When asked about the biggest challenges they face in their FX operations, only one category of nine found an increased challenge – securing credit lines. This was also flagged in the previous month’s report. Generally speaking, getting comparative quotes, demonstrating best execution, and onboarding liquidity providers were seen as a challenge by slightly less respondents; while there were bigger declines in those who felt demonstrating best execution, calculating the cost of hedges, benchmarking providers, automating processes and forecasting exposures were the biggest challenge.

There was a small downtick in those who use the phone to transact their FX business, 33.2% still do so, but this is down from 35.3% in 2023. Before the platform executives get excited, however, it is notable that via web applications, APIs, email and via a dedicated IT system also saw a decline. In fact, every transaction channel cited in the survey saw a decline in usage!

In spite of that, 36% found automation the most important priority for their FX operation, up from 32.1% in 2023, this has replaced transparency of costs as the biggest focus from the 2023 survey. Firms continue to consider outsourcing aspects of the FX business with settlement (34.4% considering it), risk identification (32.8%) and trade execution (31.6%) leading the way.

Corporates are also jumping on the AI bandwagon, with 45.6% exploring it for risk management, 38.8% for process automation, 36.4% for FX operations and 34.8% for execution. MillTechFX says “100% of corporates are now exploring the use of AI in FX”, however the survey also found that just 16% thought it would have the biggest impact on their FX business over the next five years. The related automation tools and big data & analytics, were seen as the biggest impact at 25.6%.

“Recent market fluctuations, geopolitical tensions, diverging monetary policies and macro-economic challenges have introduced rising unpredictability in the FX market,” observes Eric Huttman, CEO of MillTechFX. “The upcoming US presidential election on November 5, will add even more fuel to this fire. For instance, speculation about a potential Trump-Vance administration suggests a possible push to weaken the US dollar, given their stance on making US exports more competitive.

“Corporates also had to contend with the unexpected resilience of the US dollar which is causing significant challenges<’ he continues. “Against this backdrop, it is crucial for CFOs to reassess their FX strategies. Hedging serves as a vital tool for managing uncertainty, similar to how fire insurance protects against unexpected damage, so it’s positive to see corporates are taking a proactive approach to risk management.

“It’s clear that the hype around AI is now too big to ignore with every corporate surveyed now actively exploring its potential,” he concludes. “The primary focus of this exploration is risk management, with 46% of corporates applying AI to predict and mitigate risks, safeguarding against adverse currency fluctuations. Given corporate’s reliance on manual processes for executing transactions, it’s no surprise to see AI and automation emerge as a top priority.”