From Chaos to Clarity: Tactics to consider in today’s market

Today’s unpredictable environment is markedly different from the low volatility of 2023 and 2024, presenting several challenges. Will tariffs drive inflation and keep interest rates elevated, or will they suppress demand and trigger a global recession? Is the US dollar losing its status as the world’s reserve currency? How many more policy reversals can we expect from Trump?

In uncertain times, two trends emerge in FX:

• Periods of inertia, where participants adopt a wait-and-see approach, as we saw in March before Trump’s ‘Liberation Day’ on 2 April.
• Periods of rapid price fluctuations, with spikes in implied volatility leading to significant intra-day, intra-week, and intra-month movements. This has been the theme since the US election in November 2024, with GBP/USD fluctuating from above $1.30 to the $1.21s and back up to the $1.30s by March 2025.

Substantial exchange rate swings can significantly impact corporate profitability and cash flows, which can be exacerbated by large margin calls that expose businesses to liquidity concerns. In this environment, clients are reviewing their FX hedging counterparties to mitigate FX risk and reduce counterparty risk.

We’re seeing clients diversify and adjust their hedging strategies, adopting a proactive attitude not just towards risk mitigation but also to maximise opportunities in volatile markets. While hedging at the forward rate protects against adverse movements, these rates can quickly diverge in fast markets.

Corporates, particularly those importing from China and selling to the US, may face challenges due to tariffs that could reduce demand for their products. Therefore, solutions that provide the right, but not the obligation, to transact at a pre-agreed rate can be more advantageous.

Depending on their needs, corporates can utilise premium or zero-premium hedging solutions to maintain the flexibility necessary for effective FX risk management, aligning with their overall business strategy.

In this volatile landscape, corporates are taking proactive steps to build certainty, increasingly shifting towards portfolio approach hedging strategies to retain flexibility in an uncertain world.

We expect volatility to persist, as further changes to US trade policy are unlikely to be preceded by a warning from the White House.

We are working with clients looking to take a more active role in pre-hedging potential debt or asset exposures to limit interest rate volatility ahead of time. This guards against adverse rate movements and reduces uncertainty.

Clients are also benefitting from interest rate options they bought previously when the environment was more certain. These options have increased in value and are enabling them to lock in favourable interest rate hedge levels.

As asset prices fluctuate, credit spreads widen and the threat of the unknown increases, reducing the number of moving parts through hedging strategies tailored to the current environment is a sensible strategy.

Crude oil prices recently fell to multi-year lows and there have been large swings in industrial metal prices, particularly copper. It was not long-ago oil traded for months in a narrow range of around $4, so the fall of $15 in a week has sparked a lot of hedging interest. We have seen some clients layer in additional hedges on top of their typical strategies.

Commodity buyers still wanting to benefit from possible further price falls could opt to utilise a collar option strategy. A collar provides exposure in a price range, still allowing participation when prices fall in exchange for reduced protection if prices move higher.

With tariff and trade war headlines continuing to drive commodity markets, it is worth re-considering if your hedging strategy works for your business.

Recent suggestions by Fed Chair, Jerome Powell that the US central bank is taking a wait and see approach to rate cuts, contradicts current market pricing where the already inverted yield curve has steepened.

We have seen several clients move to a more risk-off strategy by moving away from longer-dated fixed income and keeping cash on short term deposit to benefit from the rate pick-up from the inverted curve and increase liquidity.

We expect many corporates to continue adopting a more liquidity focussed strategy trumping the riskier play of seeking the premium rate while the interest rate outlook remains uncertain.