Good morning. Foreign exchange (FX) management has become a top priority for many CFOs with global currency markets in flux.
In a note sent to clients, BofA Global Research said the FX market has been unusually calm in August—an uncommon occurrence, even during typically quiet “summer markets.” Analysts link this subdued volatility to stable rate differentials and a relatively steady U.S. dollar risk premium—factors BofA believes won’t last much longer, especially amid ongoing tariff uncertainty.
“We expect FX volatility to rise into September,” the analysts noted. While “implied volatility”—the market’s forecast of future swings, reflected in options pricing—has dipped recently, it remains elevated compared to historical norms. Most major currencies are still trading near their long-term volatility averages based on a 15-year comparison of implied versus realized volatility.
The one outlier is USD/CAD. The research shows that both three-month and one-year implied volatility for the U.S. dollar-Canadian dollar pair are at just the 5th percentile of realized volatility since 2010—suggesting that current market expectations may underestimate future moves. BofA anticipates increased volatility in this currency pairing, pointing to ongoing trade policy uncertainty and Canada’s gradual shift to more diversified trading partnerships. The long-term impact on FX rates will essentially depend on the effectiveness of tariffs, the amount of retaliation, and whether different economies prove to be resilient.
Stephen Philipson, vice chair and head of wealth, corporate, commercial, and institutional banking at U.S. Bank, recently told me that FX risk management is a pressing concern for CFOs right now. More companies are using collars—an options strategy that caps downside risk without limiting upside gains—to hedge their exposures. “And many firms are shifting to pay foreign vendors in local currencies to meet supplier demands and reduce costs,” Philipson said. He also explained that much of CFOs’ cautiousness is driven by three main issues: heightened anxiety around the tariffs, a weaker dollar, and rising working capital needs.
As volatility could return to the FX market, finance chiefs will need to stay agile and proactive.
Sheryl Estrada
sheryl.estrada@fortune.com
