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New Research: Strong Pound Affects 83% of UK Corporates’ Finances

By Dominic Sow · 25 October 2024

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A new report from FX-as-a-Service pioneer, MillTechFX, has revealed that 83% UK corporates have had their finances impacted by the stronger pound. While half of these companies saw positive outcomes, the other 50% experienced negative financial impacts, highlighting the intricate effects of currency fluctuations on business performance. The MillTechFX UK Corporates CFO FX Report 2024 is the latest instalment of the firm’s global research series, gathering insights from 250 finance leaders at UK corporates to reveal their FX challenges and hedging strategies. Rising costs are a key theme with most corporates (70%) reporting that FX hedging costs had risen over the past year, with smaller firms feeling the pressure more acutely (85%) compared to larger companies (59%). For those that don’t hedge, the main reason given was because it was too expensive (76%). In addition, two of the top three FX priorities for UK corporates this year are reducing costs (31%) and ensuring cost transparency (29%). Despite the increase in hedging costs, over three-quarters (76%) of UK corporates hedge their forecastable currency risk, a slight increase from last year (75%). Among those not hedging, 68% are now considering it due to market conditions. The average hedge length has increased 47% to 5.55 months this year, up from 3.78 last year, indicating that firms are seeking longer-term protection and stability. Meanwhile, the average hedge ratio remains steady at 45%, the same as in 2023.  Global geopolitical tensions are adding to the uncertainty for corporates, with many bracing for increased volatility. Over half (53%) of respondents plan to extend their hedge durations in response to these growing concerns. FX fears surrounding the upcoming US election are also prominent, with the top three being counterparty risk in hedging transactions (40%), the impact of policy changes on currency values (37%), and unpredictable market movements (37%).  Other notable findings include:
  • Growing interest in FX options – Finance leaders are diversifying their hedging strategies, with 64% now using FX options more frequently.
  • Corporate credit crunch – 94% of respondents reported that access to financing has become more difficult over the past year, while 79% noted rising interest rates and fees from their credit providers.
  • Reliance on manual processes – Despite advances in technology, 34% of respondents still conduct financial transactions by phone, 32% via email, and 30% by sending or uploading files.
  • The rise of AI and automation – All finance leaders polled (100%) are exploring artificial intelligence (AI) in some form.  Price discovery (34%), risk identification (30%) and trade execution (29%) are the key areas being explored for automation. Automating manual processes was corporates’ top priority (41%).
Eric Huttman, CEO of MillTechFX commented: “2024 has been a challenging year for UK corporate finance leaders as they battle against high interest rates, inflationary pressures, geopolitical tensions, supply chain issues and more. Among these challenges, heightened currency volatility stands out as a significant concern. Firms are grappling with fluctuating exchange rates that impact profit margins and overall financial stability. It’s encouraging to see the majority of UK corporates have taken proactive measures by hedging their FX risk. Those who have not embraced these strategies, however, risk facing severe financial repercussions.” “Rising FX hedging expenses are squeezing margins at a time when effective hedging is more critical than ever. Compounding this issue are tighter access to finance and increased fees and rates, further driving up the cost of doing business. Many corporate leaders may feel as though the walls are closing in on them. In this challenging environment, working with the right providers and employing technology can enable firms to get a clear sight of their costs, compare quotes from multiple providers, ensure best execution and take advantage of tools like margin-free FX hedging, reducing the need for credit and overall costs.” "As we look to the future, it’s evident that geopolitics and the upcoming US election are significantly influencing FX hedging strategies. Finance leaders are caught in a delicate balance, weighing the costs of hedging and how much to hedge against the potentially limitless expenses of not doing so. This current landscape resembles a treacherous, icy road where the path ahead is uncertain. A well-crafted hedging strategy acts like traction control, providing stability and guidance as market conditions fluctuate. Without it, companies face the risk of losing control when volatility strikes."

Companies in this story: MillTech

People in this story: Eric Huttman

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