Volatile currencies make bigger dent in bottom line

The negative impact on corporate bottom lines from weak currencies over the third quarter of 2015 was far greater than for the same period in 2014, reports FiREapps.

In its Q3 2015 Currency Impact Report, the foreign exchange management software group puts the total quantified negative impact of currency volatility in Q3 last year at US$24.02bn, more than three times the figure for Q3 2014.

A total of 399 companies – 353 in North America and 46 in Europe – reported negative currency impacts over the quarter. At US$19.29bn, the impact on US and Canadian corporates alone accounted for much of the total figure.

The average per company negative impact on European corporates of volatile currencies in Q3 2015 was US$473m, the highest figure since records began and for North American corporates was US$169m, the second-highest ever total.

For US and Canadian companies, the weakness of the euro (EUR) over the period was cited by many as impacting on their earnings, while the Brazilian real (BRL), Canadian dollar (CND), Japanese yen (JPY) and Australian dollar (AUD) were the other four most-mentioned currency culprits.

Conversely, the strengthening US dollar was the major ‘currency culprit’ for European companies, followed by the EUR, BRL, Russian rouble (RUB) and Chinese yuan (CNY).

“Volatility has come from all corners of the globe, with no signs of that trend stopping,” comments FiREapps. “Consider that in the last seven quarters, nine different currencies made it into the quarterly ‘top five’ most impactful currencies mentioned by North American corporates.

“Three-quarters of the mentions of specific currencies were about the EUR, the JPY and the BRL – large exposures for most multinational organizations. But a quarter of all mentions of specific currencies were spread across six other currencies – the CND, RUB, British pound (GBP), Venezuelan bolivar (VEF), Argentine peso (ARS) and Australian dollar (AUD).”

The report notes that while the largest exposures still account for significant currency impacts, smaller exposures – often in more volatile currencies – can also account for significant, surprising impact. “This is no longer the ‘new normal’ and instead simply the norm; making the business risks associated with this kind of volatility facts of life for multinational corporations.”

In this more challenging environment, managing currency and the associated business risks by the old ‘80/20 rule’ – having a good understanding of 80% of the company’s risks – is no longer sufficient, adds FiREapps. “Chief financial officers (CFOs) have quickly awoken to the fact that the leftover and less understood 20% now present very material risks.”

China culpability

According to FiREapps’ chief executive officer (CEO), Wolfgang Koester, China’s botched attempt last August to devalue its currency last August could presage even greater volatility to come as “China hasn’t learned how to communicate with the global markets.”

“China is an unprecedented situation,” says Koester. “While companies have lost billions due to currency impacts in the past few years ,they have never seen the second largest world economy intentionally devalue its currency suddenly like this; and in doing so, join the race to the bottom in order to grow their own economy.”

He predicts that the impacts will be felt globally, particularly by multinational corporations (MNCs) with a presence in Latin America, Asia and the Middle East. Many countries in these regions depend heavily on Chinese demand; for example China is Brazil’s leading buyer of exports.

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