Insight to All Things Currency and Treasury Management

The global currency war continues to rage. Competitive devaluation on nearly every continent continued to significantly impact U.S.-based multinational corporations in the first quarter of 2013 – to the tune of at least $3.67 billion in revenue losses, according to our first quarter corporate earnings currency impact research report.

Key highlights from the research include:

  • Ÿ213 out of 800 U.S. MNCs reported a negative revenue impact from currency fluctuations. Of those, 97 companies quantified negative currency-related revenue impact.
  • ŸIn aggregate the quantified negative impact was $3.67 billion – an average headwind of 1.11%. The average currency-driven impact to EPS was $0.03.
  • Currency impacts continue to arise from all corners; devaluation of the Japanese yen fueled competitive devaluation in Latin America and elsewhere around the world.

Earnings per Share at Risk

While the total negative top line impact was significant at $3.67 billion, even more striking is the impact to companies’ earnings per share – 3 cents on average. In an environment in which treasurers have performance objectives of no greater than 1-cent EPS impact, 3 cents is large and material. Currency impacts alone made companies miss their low end of EPS guidance!

Japan has been very forthcoming about yen devaluation, yet companies were surprised by negative yen impacts

The Japanese yen served most corporations the biggest surprise of the quarter. 89 companies mentioned it as impacting earnings – more than double the number of companies mentioning the yen in the fourth quarter of 2012 (and it is likely that many more companies were impacted by the yen, but didn’t specifically mention it).

Given the fact that Japanese Prime Minister Shinzo Abe announced the rapid devaluation of the yen when he began it at the end of 2012 – and has remained very forthcoming about his intentions to take the yen to 110 versus the U.S. dollar – it’s strange that so many companies (so many more than in 2012Q4) were “surprised” by negative yen impacts in the first quarter.

Mitigating yen impact is possible; many companies were able to avoid negative yen impacts because they proactively managed that risk. Yet still a large number of companies didn’t take the proper steps to manage yen risk and were negatively impacted as a result. They shouldn’t have been. It’s surprising how many companies are still not protecting themselves from yen impacts that everyone saw coming.

Based on the fact that so many companies were impacted negatively by the yen in the first quarter – despite continuing yen devaluation being very obvious and very public – we expect to continue to see companies being negatively impacted by the yen at least into next earnings season.

Yen devaluation sends ripples across the ocean

The devaluation of the yen ignited competitive devaluation in countries around the world – including in Latin America. In the first quarter, 43 companies reported negative impacts from LatAm currencies, almost double the number of companies reporting impacts from the euro. Of all currencies mentioned in earnings calls as impactful, the Venezuelan bolivar was second behind the yen; the Brazilian real was fourth.

Unprepared companies should expect to continue to see the impact of competitive devaluation in Japan and Latin America through the rest of this year and likely into 2014. As more and more countries join the fray of the global currency war, volatility will continue to increase – around the world.

Midcap wakeup call: medium-sized companies as a subset are impacted too

Midcap companies – those with revenue between $500 million and $2 billion – were hard-hit as well, most significantly by the yen. Over the last three quarters, an increasing number of these firms have faced negative currency impacts. Why? Because midcaps are internationalizing at a faster rate, and earlier, yet their infrastructure for dealing with the challenges of international business has not always kept pace. But with the cloud-based technology available today, midcap companies can execute on best practices and reduce their currency impact to immateriality just like large corporations can and do.

Bottom line

The bottom-line message from the first quarter is this: companies continue to be significantly negatively impacted by currency volatility. It’s not likely that any of this will change in the foreseeable future. The good news is that companies can and should update their risk management approach and manage this risk, as the stakes for it are high: earnings per share are at risk (EaR).

Read more about the impact that currency volatility had on U.S.-based multinationals in the full report. In addition to details on the trends briefly described here, you’ll learn how to think about the impact of currency volatility on earnings, and the frequency with which analysts are asking currency-related questions in corporate earnings calls.


Related publications:

ŸFX Managers: Larger than 1-cent EPS Currency Impact Unacceptable