Brexit ‘the seventh currency crisis in 18 months’

currency volatility

Currency crises typically now occur on quarterly basis rather than yearly and the sharp drop in the British pound (GBP) post-Brexit is the seventh since January 2015, reports FiREapps.

The group, a specialist in software to help firms reduce the effect of foreign exchange swings, comments: “In 2015 it was the Swiss franc (CHF) and the euro (EUR), the Chinese yuan (CNY), the Brazilian real (BRL) and the Argentine peso (ARS). In the first quarter of 2016, it was the Japanese yen (JPY).

“Over the past year, we’ve seen almost two currency crises every quarter. There is no question that the British pound will get that dubious honour in the second quarter of 2016 – and into the third quarter, given that the Brexit vote occurred at the end of Q2.”

According to Wolfgang Koester, FiREapps’ chief executive officer (CEO): “We typically don’t look ahead in our currency impact report, but in light of Brexit – a domino that could kick off many others – we posit that in Q2 (perhaps) and in Q3 (certainly), Brexit will create significant impacts on the income statements of companies who did not prepare (despite 40%+ odds of a leave vote) for Brexit.

“Because Brexit happened so late in Q2, it will be interesting to track whether the impacts show up in Q2 earnings, or more likely, Q3. Either way, it would not surprise us to see record setting reports of negative impacts totalling as much as US$35bn – US$40bn as a result of this latest crisis.”

However, FiREapps latest Currency Impact Report, covering Q1 of 2016, shows companies enjoyed a brief respite from extreme currency volatility over the three months. Foreign-exchange (FX) moves impacted company results in North America and Europe by about US$20bn during Q1, down from US$36.9bn in Q4 of 2015, the group’s data shows.

“The report covers a period that is pre-Brexit, making it the calm before the storm (but) since it’s the fifth time in six quarters companies have sustained more than US$20bn in currency headwinds, it’s not that calm,” FiREapps notes.

The index is based on a quarterly analysis of the earnings calls of 1200 publicly traded North American and European companies, dubbed the ‘FiREapps 1200’. The companies included in this data set are large multinational firms with at least 15% international revenues in at least two currencies.

During Q1, the euro was particularly impactful on the earnings of both North American and European companies. Volatility in the Canadian dollar (CAD) was also mentioned as impacting earnings by North American companies, followed by the JPY, BRL and GBP.

295 views

Related reading

us-corporates
A European Union (EU) flag flies outside of the headquarters of the European Central Bank (ECB) in Frankfurt, Germany, on Wednesday, Aug. 1, 2012. As Denmark experiments with official interest rates below zero, European Central Bank President Mario Draghi is getting a glimpse of how extreme monetary policy decisions play out in real life. Photographer: Hannelore Foerster/Bloomberg
mmfs-i
switzerland