(Bloomberg) -- British companies are locking in currency hedges for longer, driven by the pound’s surge and concerns that global geopolitical uncertainty will spur more volatility.
The average hedge length has increased to nearly six months, up from less than four months last year, currency management company MillTechFX said in a report on Thursday. UK firms are seeking longer-term protection against dramatic foreign-exchange swings, its survey of 250 chief financial officers and treasurers found.
That marks a turnaround from a year ago, when sinking currency volatility led to sagging demand for foreign-exchange hedging. Now, as the new UK government’s first budget and the US election near, one-month implied volatility in the pound has soared, hitting its highest level since April 2023 earlier this month.
“It’s evident that geopolitics and the upcoming US election are significantly influencing FX hedging strategies,” said Eric Huttman, chief executive officer at MillTechFX, an affiliate of $29 billion Millennium Global Investments. He also pointed to escalating tension in the Middle East. “Firms are clearly gearing up for a period of volatility.”
Over three-quarters of UK corporates hedge their currency exposure. Among those who do not, 68% are now considering it, though cost is the main deterrent against buying protection, the survey found. MillTechFX consulted firms with a market capitalization of between £50 million ($65 million) and £1 billion.
An additional dilemma for many is an unexpected rally in the pound. Sterling has outperformed all Group-of-10 currencies so far this year, buoyed by expectations the Bank of England may be slower to cut interest rates than peers. That’s affected corporate finances, with 83% of respondents reporting an impact from its strength.
Recent earnings provide ample evidence that it’s becoming a headache. JD Sports Fashion Plc took a £6 million profit hit from currency effects in the first half of the year and said it expects a £20 million hit in the second half. PageGroup Plc saw FX swings also knock $8 million off third-quarter gross profits, while Imperial Brands Plc estimated that foreign exchange will pose a 4% headwind on full-year adjusted operating profit.
“Firms are grappling with fluctuating exchange rates that impact profit margins and overall financial stability,” Huttmann said. “It’s encouraging to see the majority of UK corporates have taken proactive measures by hedging their FX risk.”
--With assistance from Joshua Gaunt-Warner.
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