New research from MillTechFX has revealed UK corporates have dropped their hedge ratios by around six percentage points, possibly due to increased political certainty, while US corporates increased theirs by two percentage points, potentially due to the opposite.

The MillTechFX Corporate Hedging Monitor – Q2 2024 surveyed 250 senior finance decision makers at UK and US corporates in July 2024 to provide a snapshot of corporate hedging activity and insight into influential factors and other key trends.

While corporates in the UK and US decreased their hedge tenors slightly from Q1, they are still longer than in 2023 when they were 4 and 5.5 months respectively. This suggests they are locking in hedges for longer to protect their bottom lines from a potential return to currency volatility.

The research revealed credit availability was the top external factor influencing FX hedging decisions in Q2, while counterparty diversity is the biggest priority for Q3. Meanwhile, more corporates picked out cost as the key concern than in Q1, which rocketed from 0% in the US to 10.24%.

These three factors are inextricably linked. Many corporates are struggling to access credit from their existing providers, who seemingly have tightened criteria, while others report increasing prices, forcing them to shop around for better deals from new counterparties.

Looking ahead, there will be several important factors corporates will need to consider in the coming months. In early August, we saw a huge selloff in global stock markets which saw the VIX, a gauge of stock market volatility, skyrocket by as much as 42 points, the biggest one-day spike since 1990. This is already impacting the FX market with Deutsche Bank’s FX volatility gauge increasing to its highest level since May 2023.

Interest rate divergence is also likely to move currency markets. In July, the Bank of England cut its interest rate, following a similar move by the ECB, while the Fed continues to hold rates. If this path continues, we could see both EUR/USD and GBP/USD fall as the yield benefit of higher interest rates makes the Greenback more attractive to hold.

Eric Huttman, CEO of MillTechFX, commented: “As the saying goes, ‘Skilful pilots gain their reputation from storms and tempests’. Similarly, CFOs and treasurers must navigate currency volatility, which can significantly impact financial outcomes. It is crucial for them to prioritise FX risk management to ensure their organisations and bottom lines are protected as we head into the back end of 2024.”