Less than a month from polling day, a toss-up US presidential election that could rattle currency markets is leading finance executives to bolster their companies’ foreign-exchange (FX) hedges.

In an increasingly close campaign for the presidency and Congress, Kamala Harris and Donald Trump are presenting diverging views on trade, government spending and the economy. Firms that operate across different countries are contending with a wide range of scenarios - including a Republican or a Democratic sweep - that could lead to sharp currency swings like those seen eight years ago when Trump was first elected.

That’s causing currency volatility to rise. One-month implied volatility for the euro now stands at its highest point in roughly a year; for the Mexican peso, that metric is now the highest since 2020, according to data compiled by Bloomberg. The cost of one-month options contracts tied to the Bloomberg Dollar Spot Index overall is now the highest since early 2023, the data show. 

Treasurers are increasing their companies’ hedge ratios and extending existing forwards and swaps ahead of Nov 5, according to Eric Huttman, chief executive officer at MillTechFX, a division of currency manager Millennium Global Investments Ltd. “The mindset is, ‘There’s a potential for a meaningful market change based on that election, and there’s something I can do about it now,” Huttman said.

Companies in effect are locking in more certainty while they can. Many started doing so in recent months, taking on hedges that go beyond election day to avoid near-term volatility that often leads to expensive pricing.

Some 60% of corporate finance executives say their appetite for interest-rate and currency hedging has gone up because of the political risk surrounding the election, according to a recent survey by US Bancorp of about 1,000 finance leaders. 

Companies across three distinct groups - those doing business in China, in the defence industry and in tech and semi-conductors - have shown particular interest in hedging, Milltech’s Huttman said. 

Some currencies are more in focus than others. The Mexican peso is particularly sensitive to Donald Trump’s suggested trade policies because of the close relationship between the US and its southern neighbour. 

Many companies doing business in Mexico in recent months rushed to lock in peso hedges as the currency fell following the nation’s election this June, said Paula Comings, head of foreign exchange sales at US Bancorp.

“There were fantastic hedging opportunities, and we did see a lot of those near-shorers that are already locking in hedges to buy the Mexican peso for expenses,” Comings said, referring to overseas companies that have moved operations to Mexico. 

Firms are concerned about longer-term, cyclical drivers that pushed the peso 10% higher over the course of Trump’s first term. The currency dropped sharply in the immediate weeks following his election in 2016. “Five percent, 10%, 20% move expectations, that’s what gets them worried,” Comings said.

The peso has lost nearly 20% of its value since reaching its strongest level since 2015 earlier this year. Selling accelerated after the ruling party’s win in Mexico’s June election.

Conversely, Mexican corporates are extending contracts for longer than the usual three-month periods through the first quarter of next year to lock in peso rates below 20 per dollar, said Nicolas Eguiarte, head of sales at Banco Base in Monterrey in northern Mexico.

Clients, especially importers of finished products sold in Mexico, are increasing the amount of peso exposure they want covered to 70% to 80%, up from around 50% to 60%, Eguiarte said. The bank’s volume of hedging transactions is up 60% this year.

“There is fear that Trump could win again and spark high volatility in the exchange rate,” said Gabriela Siller, head of research at Grupo Financiero Base.

Vancouver-based miner Capstone Copper Corp is particularly exposed to swings in the Mexican peso, Canadian dollar and Chilean peso, the company said in its semi-annual report earlier this year.

Capstone holds foreign-exchange collars - a form of protective options trade that sets a range for a given exchange rate - across these currencies, effectively limiting the risks of sharp market swings between now and the end of the year. 

Chief financial officer Raman Randhawa said the company is watching event risks associated with the US election. “We typically look to put collars in place so we can ensure some cost certainty,” Randhawa said. “Our strategy is to lock in a band that we’re comfortable with.” 

Asics Corp, a Japanese manufacturer of sports shoes, also looks to protect itself against currency swings. The company has a hedging strategy involving the Japanese yen, the euro, the Australian dollar and the Chinese yuan. While the company hasn’t made big changes to its framework yet, CFO Koji Hayashi said he is watching the US elections closely. 

“No matter the result of the US election, geopolitical risks are quite big for us,” Hayashi said, adding that “the tariffs in the US have a significant impact” on trade.

According to MillTech, companies more broadly are relying on options as a hedging tool, especially as currency volatility has only just started to rise from historically low levels. 

“You’ve got rates coming down, you’ve got geopolitical uncertainty, and you’ve got elections,” Huttman said. With macro uncertainty potentially impacting companies’ topline, “you try to manage your bottom line as effectively as you can,” he said.

  - Bloomberg