Insight to All Things Currency and Treasury Management

By Wolfgang Koester

$112.04 billion in revenue was erased by currency headwinds in 2015. That’s 2.8x more than in 2014 and the largest annual impact we’ve ever recorded – larger even than in 2012, at the height of the euro crisis.

The $112.04 billion number has a story to tell on its own – a story about global interconnectedness, emerging markets, and race-to-the-bottom devaluation. But there is another, even more important number:


The number of companies reporting currency headwinds has risen dramatically over the years – to 44% in Q4 2015. It is a sign of increased impacts, yes, but also a sign of increased currency awareness.

What does it mean to be currency aware?

In an article penned last year for the National Association for Corporate Directors, former Microsoft CFO John Connors answered that question:

“In currency-aware organizations, every business leader understands the impact of currency risk to their functions and uses that information to make better decisions. The board, in conjunction with the CFO, sets the policy by which currency is managed, determining what level of risk is acceptable, and at what level of risk must currency be managed. Treasury, then, is equipped with the tools to manage risk according to that policy, and, as a result, currency-aware organizations aren’t surprised by currency impacts on earnings.”

Historically, when a CEO was asked about the impact of currency volatility on the financial statement, the CEO passed the question to the CFO who more than likely passed it to the treasurer. The treasurer’s generic answer was almost always “I think we’re okay, but I don’t have the resources to say exactly what our value at risk is.” Currency risk management was viewed like insurance and, as is often the case, it is only when a fire breaks out that the organization realizes it was under-insured.

So in 2013 and early 2014, when currency impacts were relatively muted, currency-aware organizations were just as vigilant about managing currency risk – keeping up their fire insurance – as they are now. For example, Patrick Pichette, then CFO & Senior Vice President at Google, during Google’s Q4 2014 earnings call:

“On the flip side of that, I just want to kind of reinforce the fact that our FX hedging program continues to do exactly what it’s supposed to do, which is in a low volatility environment we buy insurance and in moments where we have such shocks like we’re having right now, we did get a lot of benefit out of this hedging program.”

Increasing currency awareness is a trend apparent in the Q4 2015 earnings call discussions

The companies that have not been currency aware – those that did not buy fire insurance – have been burned by currency impacts five quarters running. But that is changing. As a result of the heat, an increasing number of organizations are apparently becoming currency aware; they’re figuring out how to manage currency risk.

As the awareness trend increases, we expect to see more CEOs guide boards, investors, and analysts on how currency volatility is expected to impact the top line and what the organization is doing to protect earnings per share. Indeed, one emblem of the early stages of this growing currency awareness is CEOs’ increasing ability to preempt or answer tough questions from analysts who are themselves getting smarter about currency.

For example, Apple CEO Tim Cook began to talk currencies only 3 minutes into demonstrating a level of currency awareness not seen previously from Apple, especially at the CEO level:

“Our results are particularly impressive given the challenging global macroeconomic environment. We’re seeing extreme conditions unlike anything we have experienced before just about everywhere we look… Since the end of fiscal 2014 for instance, the euro and British pound are down double digits and major currencies such as the Canadian dollar, Australian dollar, Mexican peso, and Turkish lira have declined 20% or more. The Brazilian real is down more than 40% and the Russian ruble has declined more than 50%.”

“Two-thirds of Apple’s revenue is now generated outside the United States, so foreign currency fluctuations have a very meaningful impact on our results… $100 of Apple’s non-U.S. dollar revenue in Q4 of 2014 translated to only $85 last quarter due to the weakening currencies in our international markets. As you can see, the movement has been dramatic. Last quarter alone, the currency impact has been very large…The 8% growth rate I spoke about earlier translates to $80.8 billion in constant currency revenue, which is $5 billion more than our reported revenue. For perspective, that difference is about the size of the annual revenue of a Fortune 500 company.”

Are you currency aware?

Imagine that you’re presenting your Q1 earnings call. An analyst asks one of these questions. Can you answer?

  • How would you be impacted if the Brazilian real has another big fall?
  • How would you be impacted if China widens the yuan trading band by another 2%?
  • How would you be impacted if the euro falls to parity?

If you can’t answer these questions, then becoming more currency aware could help you protect your earnings from the kind of massive currency headwinds we saw in 2015.

For more information, you can download the most recent Currency Impact Report here.