Insight to All Things Currency and Treasury Management

Between October, 2012 and the end of December, 2013 the Japanese yen fell 35 percent against the U.S. dollar. The impact on multinational corporations was significant; the yen has been a top five currency culprit in every quarter we have conducted the Corporate Earnings Currency Impact Report. Based on our fourth quarter earnings call research, the yen finished 2013 the same way – doling out significant negative impacts to multinational corporates. Take note of emerging market trends.

This is what I wrote about the yen on January 30, 2013, in a blog post titled It’s Yen Week, with Competitive Devaluation and Currency Wars Headlining:

In addition to creating competitive advantages for Japanese companies over their global competitors, a weak yen can also significantly impact companies that do business in yen. For example, in his 2012Q3 earnings call, the CEO of a Fortune 500 company said, “For FX, the yen has been relatively stable for most of the year. We’re hopeful there will be no weakening.” The CEO went on to explain that a 1 point drop in the yen would decrease the company’s net income by $6 million.

Here is the math: the 11% yen drop we have seen since last quarter would result in a $66 million negative currency impact – that is 23% of $283 million in reported net income. Currency volatility has a direct impact on earnings per share, and hope is not a strategy.

Now, we are seeing much the same story play out in the emerging markets. As I explained last week in my guest article in Forbes (Why Panic-Prone Emerging Markets Are Breaking Down In 2014): in what Bloomberg dubbed “the single biggest sell off in emerging market currencies since 2009,” the Argentine peso plummeted 15 percent in a single day (January 23rd) and the “contagion” quickly spread to other emerging markets, including most prominently Turkey, South Africa, and Russia.

Emerging Market Currency Exchange Rates

The threat posed by emerging market currencies is potentially more complicated than the threat posed by the yen. The big difference between emerging market currency volatility this year and yen volatility in 2013 is that volatility is coming now not just from one focused currency, but a whole group of them. And it is impossible to say in which emerging market volatility will spike next. The risk, for multinationals that do business in emerging market currencies, is that volatility can drive impact larger than 1 cent of earnings per share.

Emerging market volatility is a subject I talked about with Paul Vigna of the Wall Street Journal on WSJ Live (watch the video here). I explained what emerging market volatility means for U.S. corporates with revenue in those currencies. For U.S.-based companies with revenue in Argentine peso, for example, a 15 percent depreciation – if it is not managed – could translate to a 15 percent revenue loss. Imagine, for example, a company had 50 million peso revenue that translated to $7.25 million dollars on January 23rd. On January 24th, that 50 million peso revenue was worth only $6.30 million dollars – a 15 percent loss. That could easily be the company’s entire profit margin, certainly in that region, for the period, even for the year, all because of volatility in one emerging market currency.

The only way to mitigate that risk effectively is to have an institutionalized way to get full visibility into all of the currencies on which the corporate is exposed and then to manage the risk associated. As the Treasurer of a Fortune 100 Internet company explained, “A lot of large moves in very small currencies can hurt you as much as small moves in very large currencies in terms of your exposure to those currencies. When currencies move as much as they have, as it turns out a lot of those small currencies will add up to a large amount.”

When emerging market currencies swing as widely and as unexpectedly as they are today, full visibility into all exposures is the only way to effectively manage currency risk.


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