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Insight to All Things Currency and Treasury Management

This blog post presents highlights from the just-released FiREapps 2015 Q1 Corporate Earnings Currency Impact Report, which reveals the results of our analysis of the earnings calls of 1200 publicly traded North American and European companies.

Q1 impacts aren’t more of the same – impacts are intensifying

At $31.68 billion, the total negative currency impact quantified by North American and European corporates in the first quarter was 57.0 percent higher than in 2014 Q4, and over 4 times the impact felt in 2014 Q1. The negative impact quantified by North American corporates alone, $28.94 billion, was higher even than the peak of the euro crisis.

Impact was not just on the top line either, on the bottom line, impact to earnings per share (-$0.08 EPS) was nearly double the 2014 average in North America and eight times higher than $.01 EPS impact management objective that leading multinationals set for their FX managers.

It has been three years since the worst of the euro crisis, yet volatility is higher than ever
At the height of the euro crisis, when North America-based multinationals were reporting headwinds to the tune of $20.27 billion and $22.73 billion (in 2012Q2 and 2012Q3, respectively) many people thought the world had seen the worst currency volatility. It is true that the euro crisis was one of unprecedented proportion in a world more financially interconnected than ever before.

Yet here we are less than three years later and for most major U.S. dollar currency pairs, volatility has surpassed the height of the euro crisis – as have the negative impacts reported by U.S.-based multinationals.

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Globally, the rate at which analysts are asking questions about currency risk is at an all-time high – and the questions are increasing in Complexity and Depth too

The percentage of companies fielding analyst questions about currency remained relatively high in the first quarter. 73 percent of the North American companies reporting currency impact fielded currency impact-related questions from analysts – an all-time high. 62 percent of the European companies reporting currency impact fielded analyst questions – not an all-time high, but still relatively high.

Example of Analyst Follow-up to reported Impact

“…You have already given really good detail about how you are positioned and kind of what you have done. I am more curious about when FX rates or anything starts to move this fast, how do you structure the criteria that you use to make decisions at all? I mean, is it based on a regional strategy, or do you think about defending product lines or do you think about your own cost structure?”
Analyst: Steve Barger, Analyst, KeyBanc Capital Markets, Inc.

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5 Currencies Most Mentioned in 2015 Q1 Earnings Calls as Impactful

The U.S. Federal Reserve set a QE precedent – expect more volatility as other countries follow suit
The rising strength of the U.S. dollar has been due in large part to the Federal Reserve Bank’s tapering of its so-called quantitative easing. The various measures the Fed employed to stimulate the economy since the Great Recession – including pushing interest rates to near zero and infusing trillions into the economy by buying up government bonds – were likely critical to keeping the U.S. economy out of a depression. Nevertheless, the Fed’s actions created a precedent for that kind of intervention, which has been replicated in economies including the European Union, Japan, and Russia.

For global financial markets, central bank intervention creates uncertainty, and that creates volatility. Given how tightly interconnected global economies and financial markets are, the actions of one central bank have ripple effects around the world. Those actions affect other economies, and they affect multinational corporations.

Given that context, it should not be surprising that the top currencies mentioned as impactful by corporates are those where central banks are actively intervening in the economy: the euro, with 142 North American corporates mentioning it as impactful; the Japanese yen (82 companies); and the Russian ruble (58 companies). As long as economies around the world remain weak, and central banks there see intervention as a successful stimulus tool, then we should expect to see continued currency volatility.

You never know where volatility will arise
The variety of currency culprits reported by corporates in both North America and Europe reflects the complexity of currency risk management for multinational corporations. Corporates are no longer only (or even predominantly) impacted by the top two or three currencies on which they’re exposed; corporates are now impacted by currencies from every corner of the world.

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Research records set in 2015 Q1 by North American corporates

While reports of negative currency impact to European corporates were up 17.2% and quantified negative currency impacts were up 80.3% over 2014 Q4, North American corporate impact lead the way setting research records in the following categories:

  • Largest number of North American companies reporting negative impact: (279 out of 850)
  • Largest quantified headwind ($28.94 billion): up 55.1 percent over 2014 Q4
  • Largest average impact to earnings per share ($.08 EPS): almost double the 2014 average
  • Highest rate of analyst questions ever: 73 percent of corporates who reported currency
    impacts fielded currency-related questions