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  • Hedging

US Treasurers ramp up FX hedging as the dollar continues to strengthen

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Led by Apple, US tech giants increased their FX hedges in 2021, expecting a stronger US dollar to weigh on earnings in 2022.

Russia’s war against Ukraine has led to a surge in commodity prices, helping to push the US dollar to its highest level against other currencies since the start of the pandemic. This is a challenge for US companies whose foreign earnings lose value, while supply chain squeezes make it harder to offset the FX impact by moving costs to weaker currency locations.

However, technology giants such as Apple bought themselves some protection by increasing currency hedges during the second half of 2021.

Mounting Headwinds

After reducing FX positions while expecting a weaker US dollar in the first half of 2021, treasurers were caught off guard when the trend reversed in the summer, leaving them nursing $3.9 billion in translation losses as a result of a stronger dollar by the year’s end. From mid-2021 onwards, treasurers have been actively building FX hedge positions via forwards and options contracts.

Consider the consumer electronics giant, Apple, which sells its products across the globe generating 58.1% or $219 billion of its revenue in 2021 from international markets including Europe, China, Japan and other Asian countries, is a net receiver of foreign currencies. Apple increased its notional FX derivatives to $176.2 billion in 2021, 83% or $80 billion higher than what it was at the end of Q2.

This in turn has resulted in the FX hedge ratio, or derivative notional versus the underlying FX exposure, to increase from 48% to 80% during the same period, as per EuroFinance’s calculations.

“We expect foreign exchange to be a 3-point headwind when compared to the December quarter growth rate. We currently expect FX to have a negative impact on growth of 2 points in the March quarter” said Luca Maestri, CFO at Apple

These derivatives protect gross margins from FX volatility, as well as to offset a portion of the FX gains and losses generated by the re-measurement of certain assets and liabilities denominated in foreign currencies.

Alphabet, the holding company of the tech giant Google also followed suit with a 14% or $8.5 billion increase in FX notional hedges to $70.1 billion in 2021. A quarter of these hedges are used to protect its forecasted revenue transactions from FX fluctuations while remaining hedge its investment in foreign subsidiaries, Intercompany transactions and assets & liabilities in foreign currencies.

The company reported a $1.385 billion translation loss in the second half of the year but was able to recoup 70% of the losses with its effective FX hedging strategy. Its hedge ratio marginally increased to 11.7% from 10.8% during the same period.

Computer software giant, Adobe Systems was also proactive in ramping up its notional FX hedges by 50% or $1 billion to $3.03 billion in 2021, half of these contracts are used to hedge FX volatility from Euro as the market constituted 25% of its annual revenue in 2021.

Adobe’s hedge ratio stood at 44.6% in 2021, highest in the last five years and its strategy was largely successful to attenuate the $60 million translation loss in 2021 as it recorded $53 million realised and unrealised gains from FX hedges during the same time period.

“The recent US dollar strength is expected to result in a headwind to our reported revenue and growth rates for fiscal year 2022” said Dan Durn, CFO at Adobe during its Q4 earnings call.

With almost 82% of revenue from international markets, FX hedging is of utmost importance for the computer chipmaker, Intel. The company held FX hedges for a notional value of $38 billion in 202, $6.8 billion or 22% higher than the previous year. These contracts are used to hedge the non-US dollar forecasted future cash flows and existing non-US dollar monetary assets and liabilities.

Despite hedging 58% of its international revenue in 2021, FX hedges failed to offset the $35 million translation loss in the second half of the year as the company recorded a $149 million loss on these contracts.

Intel is currently in the process of boosting manufacturing in the US and reducing its non-US manufacturing, increasing its net FX exposure. A spokesperson at Intel declined to comment.

Other technology companies including the semiconductor manufacturer, Advanced Micro devices and the networking hardware company, Cisco Systems also expanded their FX hedges as their hedge ratio marginally increased to 7.6% and 19.5% in 2021, respectively.

Towards the other end of the scale, Apple’s key competitor, Microsoft bucked the trend as it gradually reduced its notional FX hedges by 38% or $16.8 billion to $27.5 billion in the second half of 2021, which led to a decline in its hedge ratio from 42% to only 30.5% during the same time period. The company is currently increasing its international workforce faster than in the US.

In spite of shrinking its hedging activities, Microsoft realised a $273 million FX gain in the second half of the year. These contracts hedge certain balance sheet amounts and other foreign currency exposures.

In a sign of the strengthening dollar’s impact, Microsoft now expects its FX tailwind to be replaced by a headwind in 2022 according to CFO Amy Hood. A spokesperson at the firm declined to comment further.

Meanwhile, e-commerce giant, Amazon, Meta platforms, Tesla and Netflix abstained from using derivatives to hedge FX risk. These companies recorded a cumulative translation loss of $1.489 billion in the third and fourth quarter of 2021 when the US Dollar Index appreciated by 4% against a basket of six world currencies.

Amazon defends its no-hedging stance by employing a natural hedge within its operations, which means that despite significant sales from international markets, the company is able to generate operating expenses in the respective foreign currencies, resulting in a smaller base of exposure at risk due to FX volatility.