FiREapps: Currency volatility to make bigger hit on corporate earnings

Companies on both sides of the Atlantic suffered less negative currency impact during the second quarter of 2016 than in the same period a year earlier, reports FiREapps. However, the UK’s vote on June 23 to exit the European Union (EU) – towards the end of Q2 – will have impacted on many companies in the four months since then.

Since 2011 the currency management consulting firm has issued a quarterly assessment of the impact that currency volatility has on publicly traded companies and the impact – both positive and negative – that currency fluctuations have on the bottom line for multinational corporations (MNCs).

In Q2 of 2016, FiREapps says that a total of 296 companies – 225 in North America and 71 in Europe – reported negative currency impacts caused by volatility. Of the companies that quantified the impact reported that it totalled US$10.26bn, comprised of US$6.9bn in North America and US$3.36bn in Europe.

The total was 47% less than the US$19.49bn reported in Q2 2015, but 162% more than two years earlier, with only US$3.91bn reported in Q2 2014. However, since the euro crisis of mid-2012 when currency volatility was at its peak it has steadily re-established itself as normal and FiREapps believes that the calmer conditions of the most recent quarter will probably prove to be only a brief respite.

The group notes that Brexit is the seventh currency crisis recorded since the start of 2015, with currency cycles increasingly measured in quarters rather than years. The recent sharp fall in the pound (GBP) was preceded by crises for the Swiss franc (CHF), the euro (EUR), the Chinese yuan (CNY), the Brazilian real (BRL) and the Mexican peso (MXN) in 2015, followed by the Japanese yen (JPY) in Q1 2016.

FiREapps comments that Q2 is typically the quarter when the least number of currency impacts and the lowest quantified impact is reported. “We have no explanation for what drives this phenomenon, it simply seems that (repeatably) less attention is given to FX in Q2 reporting than in any other quarter,” it adds. “As a result, we expect this trend in data reporting is also obfuscating the impact of Brexit.”

During Q2 of 2016, a total of 45 North American corporates reported that GBP volatility had impacted on their earnings. Other currencies in the top five were EUR (21), the Canadian dollar (CAD) (17); JPY (11) and BRL (10). Corresponding figures for European companies in the same period were GBP (14); EUR (13); BRL (!2); CNY (11) and Russian ruble (RUB) (9).

“Like their North American counterparts, European corporates are sustaining currency surprises in all markets, across a mix of regions,” said FiREapps. “It is for this reason that an increasing number of MNCs manage currency risk across the complete portfolio of currency pairs to which they are exposed.”



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