As the 2024 US elections approach, North American
corporate CFOs are confronted with the challenges of navigating a
strengthening dollar and the uncertainties of an evolving political landscape.
According to MillTechFX’s second annual Corporate CFO
FX Report, which surveyed 250 senior finance decision-makers, the findings
highlight significant trends in foreign exchange risk management, automation
adoption, and adjustments aimed at safeguarding profit margins.
US Elections
With the upcoming US elections set to introduce
further uncertainties, corporations are adjusting their FX strategies. An
overwhelming 86% of respondents plan to increase their hedging activities,
particularly regarding the USD/CAD and USD/CNY currency pairs.
The findings revealed that CFOs are especially
concerned about how potential policy shifts could impact currency values, with
44% citing this as a major issue. Unpredictable market movements and
counterparty risks also rank high on their list of concerns.
The report noted that a strong dollar continues to
exert pressure on corporate bottom lines, with nearly all respondents expecting
the dollar to appreciate further. This trend raises alarms about profit margin
erosion and competitive disadvantage, compelling CFOs to rethink their FX
strategies.
Commenting on the report, Eric Huttman, the CEO of MillTechFX, said: “The upcoming U.S. presidential election adds a layer of
complexity to FX risk management. Potential shifts in policy, changes in
economic direction, and new geopolitical strategies could all influence the US
dollar’s value significantly.”
“Following Trump’s surprise victory in 2016, the
dollar jumped 5%, whereas it declined by a similar amount around Biden’s 2020
victory. Research suggests market participants weren’t hedging their FX risk as
much ahead of the 2020 US presidential election.”
Market volatility has increased since the beginning of 2024, prompting corporates to adjust their hedging approaches. The survey
indicates that 82% of firms hedge their forecastable currency risk, a modest
increase from 2023. However, many companies have reduced their average
hedge ratios to 49%, down from 60%, and shortened hedge lengths to an average
of just over five months.
Challenges in FX Operations
Securing credit lines has emerged as the foremost
challenge among companies, with 31% of corporates citing it as their top
concern. This shift reflects tighter risk appetites among providers and
escalating costs, which have forced many firms to seek alternative quotes.
Additionally, the findings highlighted reliance on
manual processes for executing transactions despite the availability of digital
tools. Over a quarter of respondents continue to rely on traditional methods
such as email and phone calls, which may expose them to inefficiencies and
errors.
North American corporates have identified automation
as their primary focus to address these challenges, with 36% prioritizing the
need to streamline manual processes.
This article was written by Jared Kirui at www.financemagnates.com.
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