New Research Finds That Fund Managers Are Concerned About US Election’s Impact on FX Markets

A new report from FX-as-a-Service pioneer, MillTechFX, has revealed that North American fund managers are concerned about increased foreign exchange (FX) volatility, the impact of policy changes on currency values and unpredictable FX market movements because of the US election.

As a result, 65% plan on increasing their hedge tenor, extending the period during which they are protected from volatility and 34% intend to increase their hedge ratio, protecting a larger part of their exposure and business from volatility.

The MillTechFX North American Fund Manager CFO FX Report 2024, the latest instalment of the firm’s global research series, surveyed 250 senior finance decision makers at North American fund managers to reveal their FX challenges, hedging strategies, their drive towards automation and how they plan on managing currency risk around the upcoming US election.

It also revealed that North American fund managers are battling against the stronger dollar. Over four-fifths (83%) said their returns so far this year have been impacted by the strong dollar, while 81% said their operational costs had risen, 34% significantly. Nearly all (93%) are concerned about the impact of the stronger dollar on their exposure to foreign markets, while 46% were very concerned.

Factors such as the stronger dollar and increasing volatility have led 79% of North American fund managers to hedge their forecastable currency risk, up from 72% in 2023. The average hedge ratio is 55%, a rise from 50% last year and the average hedge tenor is just over five months (5.41), up from 4.96 last year. This suggests that fund managers fund managers are hedging more of their FX risk and for longer, to protect their returns, despite 80% stating that the cost of hedging had increased in the past year.

Other notable findings include:

• The push for automation – 99% are exploring new technologies with a particular focus on process automation (41%), while 31% are considering automating their full FX workflows.
• A reliance on manual processes – A significant proportion of fund managers are still using manual processes to manage FX operations, with 26% still instructing FX transactions over email and 24% still doing so over the phone.
• Gearing up for T+1 settlement – In preparation for the move to T+1 settlement, the top changes made by North American fund managers were increased staffing (45%), enhanced communications with counterparties (43%) and upgrading IT systems (42%). 78% reported that the shift to T+1 resulted in increased operational costs.
• FX challenges and priorities – The principal operational FX challenge for fund managers is cost calculation (30%), as well as onboarding liquidity providers (28%) and securing credit lines (26%). FX counterparty credit was the key priority (36%), followed by uncollateralized hedging (29%).

Eric Huttman, CEO of MillTechFX commented: “It’s a fascinating time in the FX market in North America with the greenback strengthening, despite analysts predicting its value would drop in 2024 coupled with a highly charged US presidential election campaign which will likely move markets. It’s clear that fund managers are concerned about the potential FX ramifications, with many adopting a more proactive approach, protecting more of their currency exposures for longer as they seek to secure certainty in a climate that is anything but certain.

“The other large shift in the market was on the operational front, as market participants geared up for T+1. They increased staff and overhauled IT systems, leading to increased costs and this investment ensured the transition was smooth with CLS reporting that there has been no decrease in processed volumes.

“While there is still a reliance on manual processes, it’s great to see nearly all fund managers are exploring new technologies and focusing on automating end to end FX workflows. This will not only increase efficiencies and make their lives easier, but it will also help them protect returns from external factors such as the election.

“Overall, as we navigate through challenging market conditions and pivotal political events, a diligent and forward-thinking approach to FX hedging will be crucial for protecting returns and achieving sustainable success.”

To learn more about the impact of the stronger dollar on North American fund managers, how they are preparing for the upcoming US election and their push for automation, read the full report here: https://milltechfx.com/resources/currency-insight-and-education/the-milltechfx-north-america-fund-manager-cfo-fx-report-2024/