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FiREapps provides the necessary intelligence to manage foreign exchange exposures. FiREapps isn't a nice to have - it’s an essential tool in managing our FX risk today.
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Companies have rarely been aggressive currency hedgers, but the yen's steep decline has forced many businesses outside Japan to rethink their strategies or risk blows to their profit.
Dozens of U.S. and European companies already have taken multimillion-dollar hits since the yen started sinking sharply in November, reducing the dollar or euro value of their Japanese earnings.
Last week, the currency crossed a milestone of 100 yen to the dollar for the first time in four years, as Japanese central bankers aggressively pursue a policy designed to jump-start economic growth. Late Monday in New York, it was trading at 101.83 yen to the dollar, and currency traders see more weakness ahead.
To protect themselves from sharp currency swings, multinational companies can buy options or forward contracts to lock in exchange rates at a given level. But this hedging can be costly, and it doesn't always pay.
The Japanese yen hit its weakest level versus the U.S. dollar in more than four years last week, and the trend was continuing Monday after the weekend G7 meeting indicated the world’s largest economies will tolerate the currency’s slide, at least for now.
That slide will be an interesting wrinkle when earnings reports for the current quarter start rolling out in July, and investors should get a look at just how aggressively U.S. companies are managing their currency exposures.
In a world where central banks all over the world are striving to stimulate stagnant (or worse) economies, currency volatility is a fact of life for companies doing business international. But according to FiREapps CEO Wolfgang Koester, when a currency move like the yen’s latest slide is telegraphed for all to see, there is little excuse for companies not to be prepared and act accordingly.
US manufacturing firm Hubbell Inc experienced a rapid expansion of its global foreign exchange (FX) exposure, and found that current processes were not effectively measuring and managing this growing risk. Exposure visibility was low, and the corporation was exposed to unexpected and significant potential FX losses against its earnings. It assembled an expert project team, including several senior finance executives, to identify and implement a solution to ameliorate this issue. This case study illustrates its new FX risk solution.
Hubbell Incorporated has been in the happy position of enjoying strong growth over the last five or so years. This result has been achieved primarily through a series of corporate acquisitions, some of which had international - namely, non-US-affiliates. International business now represents almost 20% of Hubbell's consolidated business volume in its core manufacturing field, which reported a US$3bn figure in fiscal 2012. This represented an increase from the previous single digit rates of international business. Such growth presented the finance and treasury functions with new challenges, including identifying and managing a sharply increased global level of operations and a diversity of foreign exchange (FX) exposures.
Japan is the fourth-largest economy in the world, but size and health are not synonymous. Because of an unfortunate combination of events both in and out of its control, the Japan’s economy has been a value trap for nearly two decades, but all of that might have changed.
By the end of World War II, Japan was in economic ruins, but it did not take long for the economy to recover. By the 1960s, real economic growth had averaged 10%, then 5% in the 1970s, and 4% in the 1980s. A mastery of advanced technology, a culturally strong work ethic, and only 1% of GDP going to defense spending fueled growth that some economists call “a miracle.”
And they're off. Alcoa kicked off the first quarter earnings parade on Monday, reporting an increase in quarterly profit but revenue that fell short. It will be followed by major banks JPMorgan Chase and Wells Fargo this Friday and the rest of the S&P 500 over the next three weeks.
Alcoa is a good proxy on the demand side of the story for the global economy, particularly China, where an economic slowdown has been talked about, but not without debate—China has been growing consistently year after year for decades.
Currency volatility made a heavy dent in the revenues of many multinational corporations (MNCs) last year. The interconnectedness of global economies and worldwide operations of many businesses expose treasuries to currency impacts and this article suggests that adopting a portfolio approach is the best way for companies and their treasury to address foreign exchange (FX) risk.
In 2012, US-based multinational corporations (MNCs) are estimated to have lost around US$50bn in revenue because of unmitigated currency volatility. For the past two years FiREapps has analysed the quarterly earnings calls of a subset of Fortune 2000 companies where 15% or more of their international revenue is in at least two currencies. The aim is to provide insight into how currency fluctuations affect MNCs.
Dear Mr. Lew:
Congratulations, Mr. Lew, on your new job as secretary of the treasury of the most powerful, dynamic economy on the planet. I am writing to implore you, as you plan your first days in office, to re-focus the U.S. strategy on China’s currency manipulation. It is not only in our best interest that China move forward with yuan liberalization according to a proven-effective path to free exchange, but it is in China’s best interest—and the best interest of the rest of the world—as well.
Since China officially ended the yuan-dollar peg and instituted a tightly-managed float, there has been much speculation about when and how the People’s Bank of China (PBOC) will allow market forces to determine the value of the yuan. As the country has grown to become the world’s the second largest economy, China’s plans for the yuan have become even more globally significant. If China liberalizes the yuan the right way, it will be a boon for the global economy. If China doesn’t, it could set off another global economic crisis.
The key message from The NeuGroup’s FX Summit, a joint meeting of our FX Managers’ Peer Groups, was that more quality information leads to better decisions. Underscoring this message, presentations by co-sponsors Deutsche Bank and FiREapps provided numerous examples of how information, technology and analytics should be improving the hedging practices of multinational corporates.
FiREapps has built its business around helping multinationals get at better information about their FX exposures from their various ERP systems and other data sources. Wolfgang Koester, CEO and Co-Founder of FiREapps, said his company’s one word mission is “Confidence: giving treasures and CFO’s confidence that they know what their FX results impacting EPS actually will be.” In the latest release of FiREapps, there are numerous filters to perform analysis on the exposure data and drill down by currency, reporting entity and more to both better understand the sources of FX exposure on company balance sheets and validate with control frameworks that the data being drilled into represents real exposure. From there, treasury can calculate the net exposure and hedge it both more effectively and with higher levels of confidence.
Should U.S. CFOs care about what European CFOs think about the value of the euro? Short of that, should they even bother about whether other U.S. CFOs believe the dollar is currently fairly valued?
The question matters, because in the latest Duke University/CFO Magazine Global Business Outlook Survey, despite the greenback’s recent six-month high against a basket of foreign currencies, 60% of U.S. finance chiefs surveyed said the dollar is correctly valued.
Is there any conclusion we can draw from this? The numbers from CFOs in Europe are also intriguing. Thirty-two percent of respondents to the European version of the Duke/CFO study believe their home currency is overpriced, despite the euro’s 7% weakening since February 21. And in both Europe and the United States, the respondents who chose “overvalued” think their home currency needs to depreciate by more than 10%.
Large U.S. companies disclosed more than $50 billion in losses related to currency swings last year, compared with $22 billion in gains the previous year, according to data from FiREapps, a currency-risk-management consulting firm.
This year the outlook is for more such losses. The euro hit a 14-week low against the dollar on Monday as Cyprus weighed a bailout deal from the European Commission, the European Central Bank and the International Monetary Fund. Japan, meanwhile, is expected to continue with monetary policies that are likely to keep the yen losing ground against the dollar.
When foreign currencies weaken against the dollar, goods from the U.S. become more expensive in the markets that use those currencies. The sales U.S. companies do make, despite their competitive disadvantage, are further reduced when translated back into dollars.
“Companies don’t know where [the currency impact is] going to come from next quarter,” said Wolfgang Koester, chief executive of FiREapps.