Good morning. The upcoming U.S. presidential election has many finance leaders concerned about the foreign exchange (FX) market, so they’re focusing on implementing strategies to protect profit margins.
The 2024 North American Corporate CFO FX Report is new research released by London-based MillTechFX, a multi-dealer FX platform. Eighty-six percent of the survey respondents plan to increase their currency hedging activity ahead of the election, despite 73% saying hedging costs have risen, while 66% intend to increase the duration of their hedges.
FX hedging is a strategy used to protect against risks associated with fluctuations in foreign currency. One example is a so-called currency forward hedge that locks in the exchange rate for the purchase or sale of a currency on a future date.
The most hedged currency pair is USD/CAD, with 30% of respondents prioritizing it, followed closely by USD/CNY (28%), EUR/USD (25%), and GBP/USD (25%), according to the report.
The biggest FX-related concerns surrounding the coming election are the impact of policy changes on currency values (44%), unpredictable market movements (38%), increased volatility (37%) and counterparty risk (35%). The findings are based on a survey of 250 CFOs, treasurers, and senior finance decision-makers at North American companies that have a market cap of $50 million to $1 billion.
Presidential elections bring uncertainty, Eric Huttman, CEO of MillTechFX told me. I asked him if there's more FX hedging activity ahead of the 2024 presidential election compared to prior years. Research suggests market participants weren’t hedging their FX risk as much ahead of the 2020 U.S. presidential election, he said. Huttman pointed to data published by Coalition Greenwich at the time which stated 80% weren’t planning to hedge because it was too expensive and too difficult. That’s in contrast to the majority of MillTechFX’s survey respondents planning to do so, Huttman said.
The potential for policy shifts, changes in economic direction, and geopolitical moves can weigh on markets and cause fluctuations in currency values, he said.
My colleague Geoff Colvin takes a look at topics such as these, including tariffs, in his latest piece, “Kamala Harris vs. Donald Trump: Who is the better president for business?” As the presidential election approaches, “all signs point to higher tariffs on American imports—no matter who wins,” Colvin writes.
I asked Huttman if there are any drawbacks to increasing FX hedging activity. “It is not as simple as turning on a switch,” he said. CFOs must thoroughly evaluate their exposures to determine the extent to which they can afford to hedge, Huttman said. Ensuring the efficiency of FX processes—from price discovery to settlement—and selecting the right banking partners and providers is also essential, he said.
For those CFOs surveyed who didn’t hedge, the top three reasons were believing capital is better deployed elsewhere (47%), hedging being too expensive (33%) and having insufficient credit lines (33%).
Another finding of the report is that 93% of respondents said their bottom lines were affected by the strong dollar. Nearly all believe the dollar will continue strengthening and their top concerns are profit margin erosion and competitive disadvantage.
A strong dollar requires treasury teams to carefully manage FX risks and optimize cash and liquidity management, according to the report.
Sheryl Estrada
sheryl.estrada@fortune.com
The following sections of CFO Daily were curated by Greg McKenna.
