Under the impact of tariffs, US multinational companies increase their long-term currency hedging to deal with exchange rate fluctuations

Source: Zhitong Finance

US multinational corporations are extending the duration of their currency hedges to protect their cash flows from the potential impact of exchange rate fluctuations triggered by the tariff policies of the Trump administration. The adjustment of the hedging duration reflects the increased uncertainty that these multinational corporations are facing in the rapidly changing global trade landscape, especially against the backdrop of concerns about an economic recession and a weakening US dollar.

Bankers and hedging advisors have pointed out that since President Trump announced the implementation of higher-than-expected global tariffs on April 2nd, the volatility in the foreign exchange market has soared sharply, leading to floating losses in the hedging positions of some enterprises. Even those enterprises that have relatively withstood the impact of volatility are starting to extend their hedging durations.

Eric Hurtman, CEO of MillTechFX, said, "In the past week, we have seen a group of clients extend their hedging durations to the maximum available period. They hope to lock in protective measures to ride out the short-term fluctuations."

Garth Appel, Head of FX and Emerging Markets Derivatives at Mizuho Americas, said that the current hedging cycle of clients has been adjusted to 2-5 years, and the weakness of the US dollar has become one of the biggest aftereffects of the tariff-related market turmoil. Compared with short-term risk hedging, enterprises are more concerned about medium- and long-term protection.

Although the weakening of the US dollar is beneficial for US exporters to enhance the price competitiveness of their products, the uncertainty in global trade and concerns about an economic recession are prompting enterprises to take more measures to protect their future profits. The 90-day grace period granted to all trading partners except China has failed to stop the decline of the US dollar or calm the increased volatility in the foreign exchange market.

The US dollar has continued to weaken against major currencies, and the euro has reached a three-year high against the US dollar. Another important reason for enterprises to extend their hedging durations is that the increase in volatility has pushed up the cost of short-term hedging tools.

Simon Lack, Head of Investment Solutions at MillTechFX, explained, "Extending the hedging duration can maintain the protection against currency fluctuations while avoiding the recognition of profits and losses due to short-term exchange rate fluctuations."

According to data from the London Stock Exchange Group, since April 2nd, the expected volatility implied by one-month and three-month at-the-money option contracts has increased by 72% and 46% respectively. Although it has slightly declined recently, enterprises still need to pay higher costs to guard against potential short-term losses. In contrast, the two-year euro/dollar at-the-money option has only increased by 23%.

Transformation of Option Strategies

The shock of Trump's tariffs has subverted the general market expectations for the future of the euro. For US enterprises with significant sales in the European market, although the strengthening of the euro can increase the converted value of overseas earnings, it will increase the operating costs of other enterprises. Appel pointed out, "We have observed that more enterprises are establishing protection mechanisms, especially those companies that need to buy euros to pay for goods and materials."

Paula Comins, Head of FX Sales at Bank of America, said that the unexpected strengthening of the euro caught some clients off guard. "Previously, enterprises mainly optimized their hedging strategies for the Canadian dollar and the Mexican peso, but now they have shifted to preparing for the strengthening of the euro," she said.

Some enterprises have started to explore "window forward contracts." This tool combines the advantages of forward contracts with flexible execution time and is particularly suitable for enterprises with uncertain cash flow environments. The market demand for "multi-tenor optimized exchange rate contracts" with zero upfront cost is also growing. Such contracts allow enterprises to buy and sell currencies at more favorable prices on multiple maturity dates.

In the past 2-4 weeks, Comins has noticed that more clients have shifted from forward hedging to option strategies to gain greater flexibility in the ongoing trade tensions. Bob Stark, Head of Global Enablement at Kyriba, pointed out, "Option strategies have unique value. Enterprises don't need to decide on the future trend now. It's already difficult to predict the market, and the current environment is even more challenging."

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