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Donald Trump’s on-off tariffs have pushed currency volatility to multiyear highs and boosted demand for foreign exchange hedging products as companies struggle to adjust to market swings.
Currency volatility has surged in recent days to levels last reached during the collapse of Silicon Valley Bank and Credit Suisse in March 2023, according to JPMorgan’s G7 and emerging market currency volatility indices.
The uncertainty around Trump’s tariffs has created more demand for FX hedging products to offset sudden fluctuations in exchange rates that are hitting businesses with global operations, according to banks and executives at multinational companies.
Nathan Venkat Swami, head of Asia-Pacific FX trading at Citigroup, said demand for hedging products had accelerated since November, when Trump was elected, on the back of uncertainty over his administration’s trade policies.
“February saw a slowdown in activity due to the lunar new year holidays across a lot of Asia, but we saw volumes pick up again in March, with strong activity from corporate hedgers,” said Swami.
Most multinationals hedge a portion of their earnings and raise or lower that level depending on the perceived risk of currency fluctuations. The heightened trade uncertainty has led companies to increase their hedging exposure.
“As we became more risk-averse, we wanted to hedge more,” said a senior executive at a European healthcare company that manufactures and exports medical equipment from Europe to Asia.
The company records sales in China’s renminbi, which until recently had been strengthening against the euro.
It used the favourable exchange rate to buy FX contracts that offset the risk of the renminbi falling in value against the euro — an event that subsequently occurred following Trump’s “liberation day” tariff announcements on April 2.
“Going forward, with high volatility, corporates are likely to reduce risk by entering into more hedging,” said the executive.
In addition to greater corporate demand for FX instruments, a rotation out of US equities into other stock markets had further increased FX hedging volumes, said Wei Li, head of multi-asset investments for China at BNP Paribas. Investors can hedge their foreign equity holdings by shorting the local currency.
“This year the whole market changed,” said Li. “That basically creates a lot of demand for FX hedging.”
This has helped boost Wall Street banks, which reported strong first-quarter trading revenues amid high volatility triggered by the Trump administration’s market-moving announcements.
Most hedging transactions, especially for lesser-traded currencies, are conducted “over the counter” between clients and banks, but public markets data shows growing demand for futures contracts too. Investors said this reflected a broader trend of increased demand for FX hedging products.
In Hong Kong, open interest in renminbi futures — a measure of market activity — has risen to its highest levels since 2016, the year after a currency devaluation increased demand for hedging against the renminbi. On the Singapore stock exchange, FX futures volumes are on track to hit a record high this year.
“Global investors are increasingly using SGX FX futures as effective and cost-efficient hedging instruments to manage heightened market and currency volatility,” SGX said in a statement to the Financial Times.
But as Trump pushes to rework the global trade system, companies were “finding it harder to determine what their longer-term hedging requirements will look like given trade compositions will likely change”, said Swami.
The threat of an economic slowdown could add to the pressure and lower demand for hedging.
“If global growth gets affected by prolonged tariff uncertainty and trade starts getting hit, that’s a scenario where we could see FX volumes drop,” he said.