Insight to All Things Currency and Treasury Management

This blog post is excerpt from my article “As Emerging Market Volatility Returns, Managing it Demands Big Data Analytics” published on gtnews November 18, 2004.

In July, gtnews ran a story entitled ‘Emerging Markets Currency Volatility Still Impacting on Earnings’, reporting that corporations on both sides of the Atlantic were impacted by emerging market currencies in Q1 of 2014. Over the summer volatility subsided but today it is back – emerging market volatility is once again impacting corporate earnings.

The earlier piece referenced FiREapps’ research findings over the first quarter of 2014. Our most recent findings, for Q3, show that emerging markets (EMs) currency volatility was briefly dormant mid-year but is back with a vengeance. This resurgence and the resulting impact to corporate earnings illustrate two points. Firstly, EMs are by their nature more volatile than developed markets, so currency volatility flare-ups like this should be expected. Secondly, a corporate’s exposure to EM currencies presents a highly complex risk management challenge. Multicurrency accounting data is true big data. Managing it requires a big data analytics approach.

Emerging Market Volatility is Back

In Q3 of 2014, corporates reported that volatility in the Russian ruble (RUB) and the Brazilian real (BRL), in particular, impacted earnings. The RUB fell 14.3% against the US dollar (USD). The BRL strengthened over the first half of 2014, but since its peak at the end of June it has declined 12.3% against the USD – 6.6% in Q3 alone. US based motorcycle manufacturer Harley-Davidson, Inc. dealt with not only with the BRL but also the devaluation of many of their other currencies from the G10 group of economies as well. In their Q314 earnings call, Harley-Davidson’s senior vice president (SVP) and chief financial officer (CFO) reported:

quote_tall“Foreign currency exchange was US$11.5m unfavourable for the quarter. This was driven by significant weakening of our key currencies within the third quarter. The euro, yen, Brazilian real and Australian dollar devalued an average of approximately 7% from the beginning to the end of the quarter. This resulted in an unfavourable revaluation of foreign-denominated assets on the balance sheet.”

To put the negative currency impact into context: US$11.5m of unfavourable impact is material, as it represented roughly 7.5% of Harley-Davidson’s net income of US$150.1m for Q314.

Even companies that took a less material impact in this quarter from RUB and other EM currencies are seeing major damage on the year as a whole. For instance, see the following excerpt from French small appliances producer Société d’Emboutissage de Bourgogne (SEB) SA’s Q314 earnings call. Vincent Léonard, SEB’s CFO and senior executive VP replies to an analyst question regarding forex and its impact as follows:

quote_tall“We’re still looking at about €80m of ruble impact from currencies. It’s a different age in euros, if you will, because currencies have indeed moved quite a bit since July. They moved in a way that helped a little bit in Q3, but will penalise Q4. Q4 will be penalised by the strengthening of the US dollar, right; the strengthening of the yuan, the collapse these last four weeks of the ruble… and the renewed weakness of the real. So, we’ve seen a lot of moments through the summer. It helped Q3; take the real, it was a little stronger during the summer and then it weakened back again. The ruble also did a little better during the summer and then recently weakened significantly again. So, the dynamics are, obviously a little complex in that forex impact……

In an Increasingly Complex Environment, Multi-currency Accounting Data is True Big Data