North American and European corporates reported suffering negative currency impacts in Q4 2016 of $10.47 billion, despite relatively low currency volatility. Even though the overall EPS impact reported by North American companies has declined over the previous six quarters, unprepared corporates have suffered major impacts from individual currencies. For example, the British pound sterling was most mentioned as being impactful to North American corporates, yet it was not one of the top five most volatile currencies as weighted against GDP percentage.
As seen on CNBC’s “Squawk on the Street” last week with Wolfgang Koester, CEO of FiREapps, fourth quarter of 2016 suffered a $10 billion hit in negative currency impact to North American and European corporates. Comparing that to Q4 2015 where volatility was only slightly higher, corporates incurred $36 billion in negative currency impact. When comparing the amount of quantified negative currency impact in Q4 2015 to the impact in of Q4 2016, it is easy to assume volatility was lower in Q4 2016, but the lesser amount of currency impact cannot be attributed to lower volatility.
Q4 is known to show more visible quantified impacts than other quarters in the year, yet the numbers seem to show that Q4 2016 sustained $25.53 billion less in negative impact than in Q4 2015. The number of companies reporting is the major factor to the drastic difference in reported negative currency impacts and similar volatility between Q4 of 2015 and 2016. In Q4 2015, 409 North American and European companies reported negative currency impact, as compared to the only 296 companies that reported in Q4 2016.
The likelihood that the more than 100 companies who reported in Q4 2015 and did not report in Q4 2016 drastically changed their processes enough to avoid headwinds is extremely low. The companies that did not disclose headwinds in Q4 2016 most likely did not report because they are not confident in their data and when faced with the risk of reporting materially incorrect numbers they chose not to report at all.
It is not mandated that companies report negative currency impact as Management Discussion & Analysis (MD&A) requirements are lax in this area, but investors and analysts deserve to know when companies are suffering considerable headwinds that are easily avoidable and they need to be asking.
The industry standard for EPS impact is $0.01 – anything beyond that is avoidable by implementing a streamlined and technology-driven FX management program. FiREapps helps Fortune 500 and multinational companies manage their EPS risk to $0.01 and provides clear insight into where exposures lie, helping corporates hedge to their full ability. Managing currency fluctuations does not need to be difficult with the ability to implement a FX management program that works from accurate, complete and timely data.