Discover essential FX hedging strategies and currency management best practices from our foreign exchange experts.
2024 US Election: 7 Steps to Think (and Act) Strategically in FX Risk Management
In previous blogs, we dissected the impact of Democrat and Republican candidate's proposed policy measures regarding tariffs, Fed policy, and the US dollar. (See “2024 US Election: Should Risk Managers Prepare For Potential Volatility Ahead?”, and “2024 US Election: Will the Election Change the De-Dollarisation Debate?”)
We saw how difficult it was to isolate the impact of candidates’ economic proposals. For example, attempts to replace the income tax with trade tariffs would put US public finances under strain, forcing the central bank to raise short-term interest rates. This, in turn, would raise the odds of political infighting around the independence of the US Federal Reserve.
The point is: no matter how much one tries to dissect the impact of the proposed fiscal and monetary policies —either from Kamala Harris or Donald Trump— these measures would likely feed on each other. We are therefore left with an unclear path for key macroeconomic variables such as the trade deficit and the fiscal position of the United States.
Less visibility ahead? No need to despair
The US elections, especially if this week’s results are not clear-cut, are likely to cloud financial managers’ visibility regarding the trajectory of interest rates and currency rates. But there is no need to despair. This has happened in the past and is likely to happen many times in the months and years ahead.
It is worth remembering that in late 2022, thus very recently, pundits were competing for the bleakest headline. As they prepared their prognosis for the coming year, concepts like ‘Predictable Unpredictability’, ‘The Age of Uncertainty’, ‘Mega Threats’ and ‘Polycrisis’ were all the rage. At Kantox, our message to FX risk managers was to remain unfazed.
In that event, economic growth remained strong, inflationary pressures proved transitory both in the US and in Europe, and the world economy continued to display a solid performance.
What lies behind this remarkable performance? It was surely a combination of macro- and micro-economic factors. These included:
- Central bank vigilance and independence
- Continued business investment in new technologies
- The emergence of the dynamic ‘Ecosystem economy’ (*)
Dealing with a trifecta of interrelated challenges
With Currency Management Automation, CFOs and treasurers have the necessary tools to confront the trifecta of interrelated challenges that may result from the US elections:
- exchange rate volatility
- shifting interest rate differentials
- impaired forecasting accuracy
The table below describes how finance teams use automated FX programs to tackle these concerns in the face of rising uncertainty.
FX risk managers: time to think —and act— strategically
While FX risk managers have little to gain from a painstaking scenario analysis of the US election, they can make preparations. The best way to do it is to follow a checklist designed to put FX risk management as a strategically important part of the business.
It consists of the following seven steps:
- Think strategically. The job of treasurers is not to save one additional pip in terms of trading costs—rather, it's to think as owners. This is done by assessing the investments needed to turn FX risk management into a tool that enhances the value of the firm.
- Consider hedging cash flows. At large businesses, finance teams may lose sight of FX-related challenges. They may opt for only balance sheet hedging. The lack of cash flow hedging may indicate that the underlying economic risk is not properly managed.
- Avoid arbitrary guidelines. When applying layered hedging, treasury teams tend to oversimplify by arbitrarily setting hedge ratios at, say, 20%-60%-80%. If the exposure is large enough, the objective of optimising forward points may be grossly mismanaged.
- Capitalise on the power of delay. Implement automated solutions to monitor FX markets 24/7, allowing you to delay hedge execution. Benefits include less costly hedging, better cash flow forecasting, more exposure netting, and optimised collateral.
- Embrace currencies. If subsidiaries can buy in the currency of suppliers to avoid FX markups, this should be a strategic priority—even if it complicates the process of exposure collection. Offloading the underlying FX risk onto suppliers is simply too costly.
- Invest in better systems. Deploy systems that are up to the challenge of strategic FX risk management. Steps include: (a) using systems that capture all the relevant exposure from the ERP or TMS; (b) clearly setting the FX goals; and (c) automating execution.
- Prioritise transparency and reporting. Ensure that your FX risk management strategy is transparent and well-communicated across the organisation. Implement robust reporting systems that provide clear visibility into FX exposures, hedging activities, and the impact of FX fluctuations on the business. This will facilitate informed decision-making and accountability.
(*) See Venkat Atluri & Miklós Dietz. The Ecosystem Economy. How to Lead in the New Age of Sectors without Borders (New Jersey: John Wiley & Sons, 2023).
