The dollar continued to surge in 2015 and had a big impact on earnings for multiple multinationals. Indeed, a regular feature of earning seasons last year was acknowledgement of “currency headwinds” and “negative foreign-currency translation effects” having an outsized impact. As such, corporations will need to continue to adjust to the strong-dollar environment – likely for some time.
As we noted in The Year’s Top Takeaways in the December/January double issue of iTreasurer:
“The strong dollar is here for a while. [Assistant Treasurers’ Group of Thirty] Meeting sponsor Citi expects USD strengthening to continue for the next 3 to 6 years and here’s why: the strong dollar is a result of four key factors: (1) a strong US economy and tighter monetary policy vs. the opposite in Europe and Japan; (2) political and military instability associated with Russia and Ukraine; (3) idiosyncratic factors related to Greece, Brazil and China, but the most significant tenet being (4) the dramatic drop in commodity prices. Further, many countries are deliberately trying to weaken their currency to benefit their own economies. Over the six months prior to the AT30 meeting, the dollar strengthened against every currency except for three: Guatemala, Costa Rica and Ghana (which appreciated more than 8 percent). These factors aren’t expected to change soon, so the impact on the dollar will remain.” –AT30 meeting, H2 2015
So these dollar strength drivers are expected to continue haunt treasuries right on through the year and beyond. The drivers don’t include more recent issues, like oil falling farther than anyone expected and the Saudi Arabia-Iran conflict that is ratcheting up by the hour. Also, January’s non-farm payrolls numbers were fairly robust (but for sagging wages). While the jury is still deliberating about what the Fed may do, the overall strength could mean another hike at the mid-March FOMC meeting, which would underpin the dollar even more.
What should treasurers and their FX managers do? Again, as noted in the “The Year’s Top Takeaways” and according to meeting materials from The NeuGroup’s Treasurers’ Group of Thirty, “Adapt or get whacked.”
“Fully 78 percent of T30 member companies have been negatively impacted by the strong USD, and 56 percent have instituted new foreign-exchange (FX) hedging approaches while 44 percent now hedge a higher percentage of exposures. Some have shifted to options, and other changes include borrowing in FX currencies, multi-year hedging, and changing to longhaul from critical-terms match. According to Deutsche Bank, the USD is halfway through a strengthening cycle, more currencies are becoming free floating, and the volatility of emerging-market currencies is on the rise. Based on what the bank is seeing from its clients, companies have adopted dynamic, rules-based hedging strategies, more actively managed FX risk on M&A deals, and at times switched to nonconventional hedges, often in the form of economic hedges.” –T30, H2 2015
So FX managers will have their hands full. And since we are well past the blissful decade where MNCs enjoyed the fruits of a relatively weak dollar on their earnings, they’ll have to step up their game.