Multinational companies are beefing up their currency hedging strategies to protect their overseas earnings from swings that could result from a second Donald Trump presidency.
Since the US election three weeks ago, strategists and bankers say they are seeing more interest in currency options and swaps, as companies, including those in the healthcare and industrial sectors, focus on how volatile they can be during Trump’s mandate.
“The election is a big catalyst for them to think about currency risk,” said Karl Schamotta, chief market strategist at payments company Corpay in Toronto.
“Companies that have long been relatively comfortable with the direction and scale of exchange rate movements are being shaken out of that complacency.”
Trump’s election is introducing volatility into currency markets as his victory clears the way for the tariffs and protectionist trade policies that were the hallmark of his first term.
Trump said Monday he would impose a 25% tariff on all goods from Mexico and Canada, and an additional 10% tariff on Chinese goods on his first day in office, over concerns about illegal immigration and illicit drugs.
The news caused the peso to fall by up to 2%, while the Canadian dollar lost up to 1.4%.
The US dollar index, which measures the strength of the US currency against six other currencies, has risen 3.5% since the November 5 election, largely on expectations that Trump’s policies on trade and tariffs will be favorable to the dollar.
Scott Bessent, Trump’s chosen Treasury secretary, has been in favor of a strong dollar and tariffs.
Adding to the uncertainty is the 2026 review of the trade agreement between the United States, Mexico and Canada, which outlined tariff provisions and was applied during Trump’s first term. Trump has said he intends to get “a much better deal,” although the details of the changes are unclear.
Trump’s first term, marked by wide swings in trade-sensitive currencies, highlighted the need for greater hedging, analysts say.
At the same time, global central banks are trying to normalize interest rate policy while balancing concerns about growth and inflation, another potential source of volatility in the coming months.
In a survey conducted by MillTechFX between November 7 and 18, nearly 94% of financial decision makers at British and US companies said the result of the US election was prompting them to change their hedging strategies. of currencies.
Some are seeking to extend the duration of hedges, while others are seeking to increase their hedge ratios, that is, the proportion of their overall foreign exchange exposure that is protected.
Lower foreign exchange earnings
Among the currencies that companies seek to hedge are the Mexican peso and the euro.
A stronger dollar means U.S. companies’ overseas earnings are worth less when converted to dollars, eroding profits. The S&P 500 generates 41% of its revenue outside the United States, according to FactSet earnings analyst John Butters.
The Mexican peso, which has fallen 2% since the election and almost 17% so far this year through Monday’s close, is especially in Trump’s sights. The United States’ close trading partner is vulnerable to tariffs, which could disrupt companies’ supply chains. Although the interest rate differential between the United States and Mexico has narrowed since the election, the cost of covering long peso positions has increased due to the peso’s decline, said Paula Comings, head of foreign exchange sales at US Bank.
“Those selling MXN (Mexican peso) and buying dollars may be reluctant at this time to add to forward hedging volumes, but are looking at options as an alternative,” Comings said.
Companies are also facing stricter lending criteria from lenders and rising hedging costs, said Tom Hoyle, director of business development at MillTechFX, a forex trading platform, which has seen rising the use of options on m.
“Ultimately, if companies want to protect themselves in the long term, they will have to absorb higher costs or look for alternatives,” he added.
According to the survey, many companies expect trade uncertainty to also affect East Asia and Europe.
Comings said the impact on the euro, which is down 4% against the dollar since the election, had not been priced in as much before the election as it had on the currencies of Mexico and China. It is now coming under pressure from tariff negotiations, an ailing German economy and a weak manufacturing sector in some parts of Europe.
“The election results have exacerbated the need to understand at what rates some companies will not be able to afford to do international business if added tariffs and regulations are something that will also have to be taken into account,” said Juan Pérez, director of trading at Monex USA. .
With information from Reuters.
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