US Firms Hedge Against FX Volatility Ahead of the Election

Firms are bracing for potential volatility in the foreign-exchange market ahead of the upcoming U.S. presidential election. With the outcome uncertain, finance executives have increased hedging activities, particularly in currencies sensitive to U.S. policy shifts, such as the Mexican peso (EWW). Companies are locking in forward contracts and swaps to mitigate potential currency fluctuations, extending them beyond election day to avoid near-term market shocks. This cautious approach reflects concerns about a range of scenarios, from trade policies to broader economic impacts. The one-month implied volatility for several major currencies, including the euro () and Mexican peso, has surged to near one-year highs, reflecting the market’s anticipation of heightened risk. The cost of options contracts tied to the Bloomberg Dollar Spot Index has also spiked. Eric Huttman, CEO of MillTechFX, notes that companies want to avoid being caught off guard by a dramatic market shift, underscoring the importance of preemptive hedging. This marks a significant shift in corporate strategy, as firms aim to mitigate election-related risks while maintaining financial stability. Market Overview:

• Firms are increasing FX hedging ahead of U.S. election to mitigate potential volatility.
• Mexican peso and euro implied volatility surged to near one-year highs.
• Corporates extend hedging contracts beyond election day to avoid costly market shocks.

Key Points:

• Currency hedging strategies focus on the Mexican peso due to its sensitivity to U.S. trade policy.
• One-month volatility gauges reflect market fears of a turbulent post-election period.
• Major currencies like the euro and dollar have seen increased hedging demand from global firms.

Looking Ahead:

• Expectations of heightened FX volatility could intensify closer to the election date.
• Hedging activities are likely to remain elevated as firms navigate geopolitical and macroeconomic risks.
• Firms operating in Mexico may continue increasing hedges as election uncertainty lingers.

As election day draws nearer, companies are being proactive in safeguarding their bottom lines through foreign-exchange hedging. Firms in sectors such as defense, technology, and manufacturing have been particularly active, locking in rates to mitigate potential losses from currency fluctuations. The Mexican peso, in particular, has seen a notable uptick in hedging activity as businesses prepare for potential disruptions from a shift in U.S. trade policy. With rising uncertainty surrounding the election, companies are likely to continue their cautious approach in managing financial risks through to the first quarter of next year. While some executives are focusing on immediate market risks, others are adopting long-term strategies, using options and collars to ensure price stability. This heightened focus on risk management reflects growing concerns about the U.S. political landscape and its global economic impact. With inflation concerns and interest rate uncertainties also in play, companies are relying on a range of financial instruments to weather potential storms, aiming to keep their balance sheets resilient in a highly volatile environment.