Managing FX and interest rate risk: Key considerations for Corporate Treasuries in a volatile post-election landscape

Jeavon Lolay, Head of Market Insights

Niall Coakley, Co-head, Corporate Financing and Risk Management

President-elect Trump’s victory and Republican successes in Congress removed fears of a contested outcome and lifted equity markets and the dollar. However, the longer-term outlook is uncertain. In particular, it is unclear to what extent campaign policies, particularly on higher import tariffs, tax cuts, fiscal policy and immigration will be implemented once the new president is in office.

If enacted in full, or even in part, the impact of President-elect Trump’s policies could be significant. Trump has also pledged to weaken the US dollar and aims to reduce policy interest rates; both could be inflationary.

Meanwhile, in the UK, the recent Budget by the new government increased some taxes for businesses, notably National Insurance.

At this stage, many policies, in both the UK and the US, lack specific details, which makes planning difficult. This uncertainty could increase FX and interest rate volatility, which should prompt companies to reconsider financial strategy and risk management.

Clients are focused on a number of risks as they navigate the volatile post-election landscape in the UK and the US:

• Should issuance plans be brought forward to next year to capitalise on benign credit markets?

• Should interest rate risk be managed more actively, and are fixed versus floating rate exposures appropriately balanced for 2025 and beyond?

• Is net investment hedging at appropriate levels to minimise interest costs in lower-rate currencies?

• How can hedging strategies be tailored to potentially higher volatility and uncertainty?

In early 2024, many companies expedited debt issuance to avoid potential market volatility associated with the UK and US election outcomes.

Now, with economic and policy uncertainty heading into 2025, a similar trend is emerging. Companies are accelerating financing plans to take advantage of favourable debt market conditions.

The outlook for interest rates has grown increasingly unclear due to the threat of a second round of inflationary pressure from potential tariffs and fiscal policy changes. Companies should review treasury policies to align fixed and floating exposures on assets and liabilities, and minimise net interest rate volatility.

As central banks increasingly face differing domestic growth and inflation dynamics, interest rates in various currencies are diverging. This presents potential opportunities for companies to raise financing in lower-rate currencies and lock in favourable rate differentials.

Companies cannot directly shield themselves from trade tariffs but can mitigate market impacts. Strategies include pre-hedging future financing and forward-hedging FX exposures tied to new contracts or large-scale M&A opportunities. These measures can help mitigate potential tariff-related inflation or dollar devaluation.

Heightened market risks, including FX, inflation, and interest rate volatility, demand attention due to their impact on operational cash flows, balance sheets, and debt obligations.

However, companies need to look further ahead and assess the potential effects of global trade disruptions, such as supply chain bottlenecks and geopolitical uncertainties which could far exceed the impact of financial market risks.

Key uncertainties include China’s response to US tariffs and the economic implications for Europe. Additionally, the tension between policies favouring low US interest rates and the risk of overheating the economy with rising inflation adds complexity to planning.

Corporate treasury teams should model different scenarios – such as increased FX volatility or lower or higher neutral interest rates – and analyse the potential impact on cash flows and financial metrics.

They should also pre-approve documentation and procedures, so they can respond quickly to market shifts, locking in interest rates or executing FX strategies based on specific market triggers.

Lloyds is committed to supporting clients through potential market shifts in the post-election landscape in the UK and the US.

Lloyds assist clients to align their funding and risk management strategies to the requirements of more volatile world.

This includes analysis of the potential impacts of market changes on a company’s financial metrics such as cash flows, earnings, and key performance indicators. In addition, Lloyds provides peer analysis, offering insights into industry-wide strategies and best practices.

For often overburdened treasury teams, Lloyds quantitative tools can enable clients to make well-informed, data-driven decisions.

To find out more, visit our market insights and risk management resources, or speak to Jeavon Lolay | LinkedIn and Niall Coakley | LinkedIn.

While all reasonable care has been taken to ensure that the information in this article is accurate, no liability is accepted by Lloyds Bank plc for any loss or damage caused to any person relying on any statement or omission in this article.  This article is produced for information only and should not be relied on as offering advice for any set of circumstances and specific advice should always be sought in each situation.

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