LONDON -- Companies in the United States and Britain cut their hedges against big swings in the currency markets to the lowest in at least two years in the second quarter on the back of growing uncertainty about interest rates and inflation, according to a survey by FX and cash management solutions firm MillTech.
Here are the main findings of MillTech’s quarterly corporate hedging survey released on Friday:
The average hedge ratio fell from 57 per cent to 46 per cent, the lowest level since tracking began in the first quarter of 2024, when the survey began. Average hedge lengths also declined, falling from 6.62 months to 5.7 months and reaching a new series low.
Almost half of firms are now hedging between 26 per cent and 50 per cent of their exposures, while the proportion hedging between 51 per cent and 75 per cent fell from 54 per cent to 34 per cent, which suggests companies are adopting a more tactical approach, retaining greater flexibility rather than locking in higher levels of protection for longer periods, MillTech said.
Having spiked in the first quarter of the year with the start of the war in the Middle East, realized currency volatility - how much currencies actually moved - fell consistently in the second quarter, according to LSEG data.
“Overall, in Q2, corporates stepped back from the more defensive approach seen at the start of the year. Shorter hedges and lower ratios may provide greater flexibility as firms wait for clearer policy signals, but record-low levels of protection leave less room for error if rate paths diverge further or currency volatility increases,” the survey said.
The survey showed that monetary policy was the single biggest factor that influenced FX hedging decisions for companies in the U.K., while for U.S. companies, it was volatility.
MillTech surveyed 285 senior finance decision-makers at U.K. and U.S. corporates between July 24 and August 5.
(Reporting by Amanda Cooper; Editing by Toby Chopra)
