Last week Bloomberg Television featured a segment about the significant impact that currencies will have on corporations this earning season (watch it here). After explaining how currencies can impact multinational corporations, Bloomberg asked me to offer some detail on why currencies are going to continue to be significant for MNCs and how some companies are mitigating the impact.
Why currencies will continue to be significant
The impact that currencies have on multinational corporations is increasingly significant because we’re in the midst of an intensifying global currency war. Central banks around the world, in developed and developing countries alike, are actively and aggressively pursuing competitive devaluation to promote their own economies. Across industries, the effects of the currency war extend beyond increasing volatility to potentially impact the competitive advantage or disadvantage of companies.
The impacts of currencies on multinational corporations are much more significant today than five years ago in part because there is more volatility in the system (a result, in part, of the global currency war). Most global multinationals have tens if not hundreds of currency pairs, so managing just the “biggies” – the euro/dollar, yen/dollar, pound/dollar, etc. – will not effectively manage risk, because it ignores the hundreds of other currency pairs that can impact the corporation. In addition to increased volatility, across a much larger range of currency pairs, companies today are much more internationalized than five years ago: over 50% of the revenues from S&P 500 companies today come from outside the United States.
How some companies are mitigating the impact
In the face of a global currency war, increasing volatility across hundreds of currency pairs, and increasing global integration, smart companies have become what we call “currency agnostic”: they manage currency risk such that the impact of currencies falls below a pre-set threshold, no matter which ways the currencies move. Currency agnostic companies don’t care what happens to any given currency, because they have managed the risk in both directions. Avnet, for example, has said that they are not doing anything special to mitigate their Euro crisis risk as it has already been addressed within their daily exposure and risk management actions within the portfolio of exposures they manage.
Avnet, along with many other currency agnostic companies, leverages FiREapps technology to know all their currency exposures around the world at the push of a button. Learn more about Avnet has leveraged FiREapps technology to support its business needs. So these companies can know, at any moment, where their exposures are – on revenue, expenses, A/R, A/P, intercompany loans, etc. – across the portfolio of hundreds of currency pairs around the world that continue to move. FiREapps helps these companies gather that information, gives it to them in a way that they can look at it and quickly make decisions to mitigate that risk.
Clearly, managing currency risk is critical for Treasury, the CFO, and the CEO. But there’s a message for investors and analysts too: When you’re thinking about currencies, you need to know that there are companies out there who leverage technologies such as FiREapps to become currency agnostic, so that no matter what happens in the world, currency is not a material impact on the bottom line. As the impact of currencies increases, the importance of being currency agnostic will increase, too.