Corporate FX hedging falls to record low as firms retreat

Corporate foreign exchange hedging levels fell sharply in the second quarter across UK and US businesses, retreating from a record high in the previous quarter, according to MillTech's latest survey.

The average hedge ratio dropped to 46% in Q2 from 57% in Q1, the lowest level since MillTech began tracking the measure in Q1 2024. Average hedge length also fell to 5.7 months from 6.62 months, another series low.

The survey covered 285 senior finance decision-makers at UK and US corporates and points to a marked shift in approach after firms increased protection earlier in the year.

Almost half of companies hedged between 26% and 50% of their exposures in the second quarter. Meanwhile, the share hedging between 51% and 75% fell to 34% from 54% in the first quarter.

The retreat was sharper in the UK than in the US. Among UK respondents, average hedge ratios fell to 45% from 58%, while hedge lengths dropped to 5.35 months after declining by more than one and a half months.

MillTech's figures also showed a shorter time horizon among British firms. The proportion of UK businesses hedging for only one to three months rose to 19%, while the share hedging for seven to nine months more than halved.

US companies also reduced cover, though less sharply. Even so, American firms continued to hold slightly higher average hedge ratios and longer tenors than their UK counterparts.

Losses from exposure

Despite the lower level of protection, reported losses from unhedged foreign exchange exposure were lower than in the previous quarter. Some 88% of firms still reported a negative impact, but average losses fell to about GBP £580,000 from roughly GBP £909,000.

The proportion of businesses reporting losses of at least GBP £1 million also dropped to 5% from 14%. Even so, unmanaged currency exposure remained widespread across the companies surveyed.

There was a notable gap between the two markets. Average losses among US respondents were about GBP £687,000, compared with GBP £418,000 in the UK.

Only 5% of US firms said they experienced no impact from unhedged exposures, compared with almost a quarter of UK businesses. More than half of US respondents reported losses of at least GBP £500,000.

Policy focus

Central bank policy was the leading external factor affecting hedging decisions overall, cited by 17% of respondents. Volatility followed closely at 16%.

The balance differed by geography. UK firms ranked central bank policy as their main concern, while US respondents put market volatility first.

Interest-rate expectations were also split. Overall, 59% of firms expected central banks to increase rates, rising to 70% in the US and falling to 42% in the UK.

A third of UK respondents expected rate cuts, compared with 10% in the US. Those differences appear to reflect distinct views on monetary policy and inflation pressures in the two economies.

If rates rise, 52% of all firms said they would increase hedge ratios. On hedge duration, views were mixed: 43% said they would extend hedge tenors, while 45% said they would shorten them.

US corporates indicated a more defensive response to a rate rise. The survey found that 58% would increase hedge ratios and almost half would shorten hedge tenors.

UK firms were more evenly divided on duration. Similar proportions said they would extend or shorten their hedges if rates moved higher.

Eric Huttman, Chief Executive Officer of MillTech, said the findings showed a clear reversal after a stronger start to the year.

"Q2 2026 was marked by growing uncertainty over the direction of interest rates on both sides of the Atlantic. At their June meetings, the Federal Reserve held its target range at 3.5%-3.75%, while the Bank of England kept its rate at 3.75%, with two policymakers voting for an increase. Meanwhile, annual inflation stood at 3.5% in the US and 2.6% in the UK in June, illustrating the different pressures facing internationally active businesses.

"The most striking finding from the Q2 survey is the sharp reversal in corporate hedging activity. After increasing protection to record highs in Q1, firms pulled back during the second quarter. The average hedge ratio fell from 57% to 46%, the lowest level since tracking began in Q1 2024. Average hedge lengths also declined, from 6.62 months to 5.70 months, reaching a new series low. Almost half of firms are now hedging between 26% and 50% of their exposures, while the proportion hedging between 51% and 75% fell from 54% to 34%.

"These findings suggest that corporates are adopting a more tactical approach, retaining greater flexibility rather than locking in higher levels of protection for longer periods. This was particularly pronounced in the UK, where average hedge ratios declined from 58% to 45%, while hedge lengths fell by more than one and a half months to 5.35 months. The proportion of UK firms hedging for only one to three months quadrupled to 19%, while the share hedging for seven to nine months more than halved. US firms also reduced their cover, but less sharply, suggesting UK businesses have become especially reluctant to commit to protection further ahead.

"Despite this pullback, it is encouraging to see that losses from unhedged FX exposures fell significantly. While 88% of firms still reported a negative impact, average losses declined by more than a third, from approximately £909,000 in Q1 to £580,000 in Q2. The proportion of businesses losing at least £1 million also fell from 14% to 5%. This improvement should be viewed with some caution, however, as it coincided with lower hedge ratios and shorter tenors, meaning it cannot be explained by firms increasing their protection. The timing of currency movements, changes in underlying exposures and other risk-management decisions may also have contributed.

"Nevertheless, average losses of more than half a million pounds per firm demonstrate that unmanaged FX exposure remains a significant threat to corporate balance sheets. The transatlantic difference was also notable, with average losses among US respondents reaching approximately £687,000, compared with £418,000 in the UK. Only 5% of US firms experienced no impact, compared with almost a quarter of UK firms, while more than half of US respondents lost at least £500,000. US corporates therefore appear to be carrying greater residual FX risk, despite maintaining slightly higher average hedge ratios and longer tenors than their UK peers.

"Central bank policy was the leading external factor influencing hedging decisions overall (17%), followed closely by volatility (16%). It was the top concern in the UK, while volatility ranked first in the US. This indicates that UK firms are focused more closely on the direction of monetary policy, whereas US businesses are placing greater emphasis on managing near-term market movements.

Looking ahead, 59% of firms expect central banks to increase rates, rising to 70% in the US but falling to 42% in the UK. A third of UK respondents expect rate cuts, compared with only 10% of US firms. If rates rise, US corporates are more likely to respond defensively, with 58% planning to increase their hedge ratios and almost half intending to shorten their tenors. UK firms are more divided, with similar proportions planning to extend and shorten the duration of their hedges. Overall, in Q2, corporates stepped back from the more defensive approach seen at the start of the year. Shorter hedges and lower ratios may provide greater flexibility as firms wait for clearer policy signals, but record-low levels of protection leave less room for error if rate paths diverge further or currency volatility increases. With central banks themselves divided over their next moves, businesses will need to balance the value of flexibility against the certainty that a robust hedging programme can provide."