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Insight to All Things Currency and Treasury Management

For the last two and a half years, multinational corporations have consistently lost money to currency impacts. The trend continued in the second quarter of 2013, when the aggregate quarterly impact from currency volatility totaled at least $4.04 billion in losses.[1] The average currency impact to earnings per share (EPS) was $.03 – three times higher than the industry standard benchmark of less than $.01 EPS.

Added to first quarter losses, second quarter losses bring the total lost to currency impacts so far this year to $7.7 billion. Had those earnings stayed in corporate coffers, it could have created 308,000 jobs, or been put to some other productive use.[2]

Trend: Increasing awareness of EPS@Risk

There is an increasing number of companies that are making the connection between currency volatility and impact to earnings per share, and are therefore reporting currency impact as a function of EPS. That trend represents a break from the past; previously, there was no consistent, standardized way to report currency impact.

Seeing currency impact as EPS at risk (EPS@Risk) is a best practice because it reflects the underlying reality: currency affects EPS and – as a consequence – shareholder value. Within that context, it becomes clear how important currency risk management is; risking EPS is dangerous because investors tend to react (usually negatively) first and ask questions later on surprises.

Yen and LatAm residual impacts continue; Aussie dollar surprise is omen for euro

Four of the five currencies that companies mentioned as impactful in second quarter earnings calls also made the top five list in the first quarter. The Japanese yen continued to impact multinationals, for the third quarter in a row. Euro-related impacts are rising again as upcoming elections in the euro zone keep currency volatility high. And the two Latin American (“LatAm”) currencies that were most frequently cited last quarter – the Venezuelan bolivar and Brazilian real – were frequently cited in the second quarter too, reflecting the residual impact from volatility in the region that continues to plague multinationals.

The newcomer to the top five list is the Australian (Aussie) dollar, which has not been a top-cited currency since we started keeping track in 2012. The Aussie dollar fell 12.3% relative to the U.S. dollar in the second quarter – largely the result of fears about upcoming Australian federal elections. That fall demonstrates how politics can impact currency volatility. In fact, the Aussie dollar surprise portends increasing euro volatility in advance of the German elections.

Looking ahead to Q3: Watch for Russian ruble, Indian rupee, and Brazilian real

In a few months, when we produce this report for the third quarter, we fully expect to be talking about companies impacted by the Brazilian real, Indian rupee, and Russian ruble. In fact, in the third quarter to date, these currencies are already impacting corporate earnings, even though companies are not yet reporting those impacts.

The reason is volatility: as of this writing, in the third quarter to date the Brazilian real has declined as much as 10.6% against the U.S. dollar. The Indian rupee has declined as much as 14.1%. The Russian ruble has been marked by dramatic volatility, down as much as 3.9% and up by as much as 3.7%. It is because of that volatility that we expect these three currencies to materially impact third quarter earnings for the companies that are not managing their currency risk.

Read more about the impact that currency volatility had on U.S.-based multinationals in the full 2013Q2 Currency Impact Report. In addition to details on the trends briefly described here, you will learn three steps in how to think about currency volatility and EPS@Risk – critical steps in actually managing currency risk to less than $.01 EPS.

 

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[1] As we have said before, impacts are likely to be underestimates. There are two reasons why: first, it is almost certain that companies which faced currency headwinds did not specifically point them out. Second, of the total number of companies that did report negative impacts, only 41% of them actually quantified the impact.

[2] Assuming an average annual salary of $50,000 ($25,000 over half a year).