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Insight to All Things Currency and Treasury Management

Euro volatility had significant negative impacts on multinational corporations in a number of ways in 2012. In the second quarter, euro volatility caused billions in losses. Then in the third quarter, all eyes were on Europe, so corporate executives and analysts alike were surprised by significant losses ($22.7 billion in aggregate) driven not by euro volatility but by volatility in the Brazilian real, Indian rupee, Japanese yen, and Canadian dollar.

2013 promises more of the same in that the euro will be front-and-center when multinational corporations have to again report significant currency impacts. In fact, euro volatility – even if there is a quiet before the storm – will increase likely to unprecedented levels as the euro zone unravels.

In our recent white paper, The Perfect Currency Storm: What Executives Need to Know to Navigate Troubled Waters, we talked about why euro volatility will intensify in 2013. In the two and a half years since the euro crisis began, it has continued to deepen. The frequency of bailouts, elections, downgrades, and refinances has increased, with one typically following another like dominoes. All the while, the euro has grown increasingly volatile. The relationship between events like ratings downgrades, debt refinancing, bailouts, and elections in the eurozone and volatility of the euro is a preview for what is to come in 2013.

A number of upcoming events will result in even deeper currency risk. The most significant of those is the national German election, which will be held no later than October 2013 (and could well be sooner). As we saw in national elections in France and Greece, popular sentiment against austerity measures very clearly drove voter choice. The same has happened in Germany, but it was largely popular sentiment against bailing out debtor nations that drove German Chancellor Angela Merkel’s losses in key state elections. It doesn’t bode well for her fate in the upcoming national election.

Recent surveys show between 39 and 54 percent of Germans favor leaving the euro.[1] Facing the very real possibility of election defeat, Merkel will have to either change course (sooner than later) or risk losing her job, in which case the new chancellor will quite likely chart the course mandated by German voters. However it happens, a German exit from the euro would be the euro zone’s swan song. Until that happens, expect a significant increase in euro volatility.

NOTE: This is the second of a series of posts on the three themes we are watching in 2013. Learn about the first theme here. Stay tuned for my upcoming post on the third and final theme.

On January 23rd at 2pm ET FiREapps is hosting a webinar, “Managing Currency Risk in 2013” where you’ll get actionable insights into the coming fall of the euro and other macroeconomic trends that are driving volatility this year. The webinar will also include a discussion around what leading multinational corporates are doing to prepare for this volatility with timely, accurate and complete visibility into their fast-changing currency risks.
 

 

 

 


[1] Bloomberg, “Germans Show Lowest Support for Keeping Euro in Four-Nation Poll,” 24 Jun 2012. Also Spiegel, “Germans Oppose Further Euro Crisis Bailouts,” 6 Jul 2012.