Trump's Return: Companies Fortify Currency Hedges Amid Tariff Uncertainty
Tuesday, Nov 26, 2024 1:06 pm ET
5min read In the wake of Donald Trump's imminent return as U.S. president, multinational corporations are taking proactive measures to safeguard their overseas earnings from potential currency volatility. Since the U.S. election three weeks ago, strategists and bankers have witnessed an increase in interest for options and cross-currency swaps, as businesses, particularly in healthcare and industrial sectors, evaluate how volatile currencies may behave under Trump's administration.
Trump's victory has introduced volatility into foreign-exchange markets, as his win paves the way for tariffs and protectionist trade policies, which were hallmarks of his first term. On Monday, Trump announced his intention to impose a 25% tariff on all products from Mexico and Canada, and an additional 10% tariff on Chinese goods, citing concerns over illegal immigration and illicit drugs. These announcements prompted the peso to drop as much as 2% and the Canadian dollar to fall as much as 1.4%. Consequently, the U.S. dollar index has risen 3.5% since the Nov. 5 election, reflecting expectations that Trump's policies on trade and tariffs will be dollar-supportive.
Scott Bessent, Trump's U.S. Treasury secretary pick, has favored a strong dollar and supported tariffs, contributing to the USD's strength. Adding to the uncertainty, the 2026 review of the United States-Mexico-Canada trade agreement is looming, with Trump aiming to make the agreement "a much better deal," although the specifics of the changes remain unclear. Trump's first term, marked by significant swings in trade-sensitive currencies, underscored the need for companies to adopt more hedging strategies.
At the same time, global central banks are attempting to normalize interest-rate policy while balancing growth and inflation concerns, which could lead to further currency volatility. According to a survey conducted by MillTechFX between Nov. 7 and 18, around 94% of senior finance decision-makers at UK and U.S. companies indicated that the U.S. election outcome was prompting them to alter their foreign-exchange hedging strategies. Some businesses are seeking to extend the duration of hedges, while others are looking to increase their hedge ratios – the proportion of their overall foreign-exchange exposure that is protected.
Among the currencies that companies are focusing on hedging are the Mexican peso and the euro. A stronger dollar means that U.S. companies' foreign revenue is worth less when converted to dollars, which erodes profits. The S&P 500 generates 41% of its revenues outside the U.S., according to John Butters, senior earnings analyst at FactSet. The Mexican peso, particularly vulnerable to Trump's tariffs, has fallen 2% since the election and nearly 17% year-to-date as of Monday's close. Although the interest-rate differential between the U.S. and Mexico has tightened since the election, the cost of hedging long peso positions has increased due to the peso's slide.
Businesses are also grappling with tighter credit criteria from lenders and rising hedging costs. Tom Hoyle, business development director at MillTechFX, a currency trading platform, noted that companies are increasingly turning to FX options as a result. Many businesses anticipate that trade uncertainty will weigh heavily on East Asia and Europe as well, further emphasizing the need for hedging strategies.
Paula Comings, head of foreign-exchange sales at US Bank, pointed out that the impact on the euro, which has depreciated by some 4% against the dollar since the election, was not priced in ahead of the election to the same extent as in Mexico's and China's currencies. She is now seeing some U.S. healthcare and industrial companies express interest in using euro cross-currency swaps to manage currency risks and lower their interest payments. Yearly return on these euro/dollar contracts has risen since the election to as much as 2% on contracts two years or longer, highlighting the allure of these contracts.
In conclusion, as Trump's return as U.S. president looms, multinational corporations are taking proactive measures to fortify their currency hedging strategies in anticipation of potential tariffs and currency volatility. Businesses are turning to options and cross-currency swaps to protect their overseas earnings from adverse currency movements. The uncertain trade environment, particularly concerning the Mexican peso and the euro, compels companies to adopt more hedging strategies to maintain profitability. As the global economy braces for potential market disruptions, businesses must remain vigilant and adapt their strategies accordingly.
Trump's victory has introduced volatility into foreign-exchange markets, as his win paves the way for tariffs and protectionist trade policies, which were hallmarks of his first term. On Monday, Trump announced his intention to impose a 25% tariff on all products from Mexico and Canada, and an additional 10% tariff on Chinese goods, citing concerns over illegal immigration and illicit drugs. These announcements prompted the peso to drop as much as 2% and the Canadian dollar to fall as much as 1.4%. Consequently, the U.S. dollar index has risen 3.5% since the Nov. 5 election, reflecting expectations that Trump's policies on trade and tariffs will be dollar-supportive.
Scott Bessent, Trump's U.S. Treasury secretary pick, has favored a strong dollar and supported tariffs, contributing to the USD's strength. Adding to the uncertainty, the 2026 review of the United States-Mexico-Canada trade agreement is looming, with Trump aiming to make the agreement "a much better deal," although the specifics of the changes remain unclear. Trump's first term, marked by significant swings in trade-sensitive currencies, underscored the need for companies to adopt more hedging strategies.
At the same time, global central banks are attempting to normalize interest-rate policy while balancing growth and inflation concerns, which could lead to further currency volatility. According to a survey conducted by MillTechFX between Nov. 7 and 18, around 94% of senior finance decision-makers at UK and U.S. companies indicated that the U.S. election outcome was prompting them to alter their foreign-exchange hedging strategies. Some businesses are seeking to extend the duration of hedges, while others are looking to increase their hedge ratios – the proportion of their overall foreign-exchange exposure that is protected.
Among the currencies that companies are focusing on hedging are the Mexican peso and the euro. A stronger dollar means that U.S. companies' foreign revenue is worth less when converted to dollars, which erodes profits. The S&P 500 generates 41% of its revenues outside the U.S., according to John Butters, senior earnings analyst at FactSet. The Mexican peso, particularly vulnerable to Trump's tariffs, has fallen 2% since the election and nearly 17% year-to-date as of Monday's close. Although the interest-rate differential between the U.S. and Mexico has tightened since the election, the cost of hedging long peso positions has increased due to the peso's slide.
Businesses are also grappling with tighter credit criteria from lenders and rising hedging costs. Tom Hoyle, business development director at MillTechFX, a currency trading platform, noted that companies are increasingly turning to FX options as a result. Many businesses anticipate that trade uncertainty will weigh heavily on East Asia and Europe as well, further emphasizing the need for hedging strategies.
Paula Comings, head of foreign-exchange sales at US Bank, pointed out that the impact on the euro, which has depreciated by some 4% against the dollar since the election, was not priced in ahead of the election to the same extent as in Mexico's and China's currencies. She is now seeing some U.S. healthcare and industrial companies express interest in using euro cross-currency swaps to manage currency risks and lower their interest payments. Yearly return on these euro/dollar contracts has risen since the election to as much as 2% on contracts two years or longer, highlighting the allure of these contracts.
In conclusion, as Trump's return as U.S. president looms, multinational corporations are taking proactive measures to fortify their currency hedging strategies in anticipation of potential tariffs and currency volatility. Businesses are turning to options and cross-currency swaps to protect their overseas earnings from adverse currency movements. The uncertain trade environment, particularly concerning the Mexican peso and the euro, compels companies to adopt more hedging strategies to maintain profitability. As the global economy braces for potential market disruptions, businesses must remain vigilant and adapt their strategies accordingly.
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