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Insight to All Things Currency and Treasury Management

This blog post presents highlights from the just-released FiREapps 2014 Q3 Currency Impact Report, which reveals the results of our analysis of the earnings calls of 1200 publicly traded North American and European companies.

After the second quarter, in which volatility was relatively muted, there was resurgence in volatility in the third quarter. A significantly larger number of North American corporates reported impacts from the euro and the yen. Among European companies, more companies mentioned the Russian ruble as impactful.

Volatility will likely continue at current levels or worsen; indeed, in the fourth quarter to date, volatility has increased substantially. Fundamental issues including the rollback of stimulus in the U.S. and eventually rising U.S. interest rates, quantitative easing in Europe, devaluation in Japan, falling oil prices, and geopolitical turmoil will continue to drive turbulence in the currency markets well into 2015.

The impact of currency surprises in Q3 was real, especially in North America: Among the North American companies reporting currency impacts in the third quarter, over 10 percent shifted their full-year EPS guidance (rolling back guidance by $0.07 EPS on average) with many directly referencing the uptick in volatility during the last month of the quarter as the basis for the shift.

Key Highlights

  1. Total negative currency impact doubled in the third quarter. The total reported negative currency impact in 2014 Q3 was $8.0 billion, over double the reported negative impact from Q2. The number of corporates reporting negative currency impacts increased as well, 9 percent over Q2. To put the real impact of currency surprises into perspective, consider that $8.0 billion in quarterly revenue eroded equates to 640,000 jobs.1Figure 1: Total Negative Currency Impact Reported by Companies in 2014 Q3q32014-impacts na eur
  2. In both North America and Europe, a greater percentage of corporates fielded analyst questions. The percentage of companies fielding analyst questions about currency rose in the third quarter. 46% of the North American companies reporting currency impact fielded currency impact-related questions from analysts; 51% of the European companies did. As a historical trend, analysts are more likely to ask about currency impact when more companies are reporting more significant impacts.Figure 2: Analyst Questions to North American & European Companies About Currency Impactq32014-analyst qs na eur
  3. The increase in currency impacts flows from a marked increase in volatility in the third quarter – in currencies across the globe. 2014 Q2 was a period of relatively low volatility; as a result, negative currency impact was relatively low. In Q3 there was resurgence in volatility. As a result, aggregate negative currency impact reported by North American and European corporates was over double in the third quarter compared to the second.A significantly larger number of North American corporates reported impacts from the euro and the yen in the third quarter (72 and 34 in Q3 compared to 8 and 5 in Q2, respectively). The number of European companies mentioning particular currencies was similar in Q3 as Q2, though more companies mentioned the Russian ruble as impactful in Q3 than Q2.Figure 3: 5 Currencies Most Mentioned in 2014 Q3 Earnings Calls as Impactful

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  4. Volatility is going to get worse before it gets better. Figure 4 and Figure 5 reveal volatility in the fourth quarter to date. Relatively high volatility in the third quarter was not an aberration; low volatility in the second quarter was. Indeed, in the fourth quarter to date, volatility has increased substantially. Fundamental issues including the rollback of stimulus in the U.S. and eventually rising U.S. interest rates, quantitative easing in Europe, devaluation in Japan, falling oil prices, and geopolitical turmoil are expected to continue to drive turbulence in the currency markets well into 2015.Figure 4: 2014 Q3 Currency Culprits – U.S. Dollar Exchange Ratesq32014-5 culprits na

    Figure 5: 2014 Q3 Currency Culprits – Euro Exchange Rates

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