Insight to All Things Currency and Treasury Management

Wild swings in the euro/U.S. dollar exchange rate wreaked havoc on U.S.- and Europe-based multinationals in 2010, 2011, and 2012 – and, to a lesser extent, 2013. In 2014, European corporates are seeing impacts from the euro for a different reason. This year, it’s not volatility but rather, surprising impacts from a strong euro against expectations.

2014 forecasts call for weaker euro

Despite a broadly stronger euro in 2013, analysts forecast that the currency would depreciate in 2014. For example:

  • December 10, 2013 – SeekingAlpha predicted the euro would in 2014 “underperform outright and eventually head back toward its 2013 low”¹
  • December 13, 2013 – The mean estimate in a Bloomberg survey of 46 contributors is for the euro to fall from 1.3758 to 1.28²
  • March 19, 2014 – The median estimate in a Bloomberg survey has the euro falling to 1.31 by the end of 2014³

Based on analyst forecasts, many European corporations planned euro depreciation into their 2014 earnings guidance. (When a company provides guidance on earnings, it bases that guidance on its planned or budget exchange rates.) But when the actual exchange rate is different than the planned or budget rate that can cause top-line translation impacts for the company. When the company’s reporting currency – the euro, for many European corporates – is higher than the planned or budget rate, that can erode top-line revenues.

Euro defies expectations

Indeed, that is what has happened this year. Analyst predictions that the euro would fall have proved wrong, and corporates that guided based on a lower EUR/USD have seen revenue eroded. The blue line in Figure 1 shows the EUR/USD exchange rate from January 1, 2009 through May 18, 2014. Since the beginning of 2014, the euro has broadly strengthened against the dollar. (In the last week, the euro has weakened, which may or may not be the beginning of a new downtrend. Regardless, the euro has – as Figure 1 makes clear – strengthened significantly over the last year.)

Surprising impacts for European corporates

European companies that issued earnings guidance based on a weaker euro now have to explain the erosion of top-line revenue to analysts and investors. Add emerging market currency volatility into the mix, and the effects on European companies are even more significant – because while EUR/USD is the largest exposure for many European companies, it’s not the only exposure.

We’ve seen this phenomenon before – in the U.S., when a stronger-than-expected dollar caught U.S.-based corporates by surprise. And we’re seeing European companies do what their U.S. counterparts have done in responses to currency surprises – step back and think about how to manage currency risk to avoid these kinds of surprise impacts.

The first issue companies are addressing is how to look holistically across the income statement and balance sheet and understand all the places that currency volatility can have an impact, and then to look holistically at the full range of currencies on which the company is exposed.

Companies are also looking at ways to manage translation risk – the impact of differences between planned or budget rates and actual exchange rates that can erode top-line revenue. That is not to say European companies are en masse moving to hedge translation risk (though some are) but certainly that companies want to ensure that they’re managing expectations when they issue earnings guidance.

Bottom line

The bottom line for European companies is this: if you missed earnings expectations because the euro ended up stronger than you had planned – and you’re taking heat from board members and analysts as a result, now is the time to think about how you assess your currency exposures. And then, how you manage them.

We’ll be writing more about the impact of euro strengthening on European corporates in the weeks and months to come – including about how these recent currency surprises have changed how many European corporates think about managing currency risk. Stay tuned.


[1] SeekingAlpha, “Global Currencies Forecast: 2014” 10 Dec 2013.

[2] Bloomberg, “Goldman Sachs Goes Against Consensus in Dollar Call,” 13 Dec 2013.

[3] Bloomberg, “Dollar Reaches Strongest in Two Weeks Against Euro; Real Climbs,” 20 Mar 2014.