The third quarter of 2015 saw the highest number of companies reporting negative currency impacts since it’s been tracked, according to currency analytics company FiREapps.
In its latest quarterly report, FiREapps says that out of 850 North America-based MNCs that FiREapps analyzed, 353 reported negative currency impacts in the third quarter; this is more than twice the number of companies that reported negative impacts in the second quarter. The 353 number “is also the highest number of companies reporting negative currency impacts since we began this research in 2011—higher than the height of the euro crisis (2012) when 250 companies reported negative impact,” FiREapps said in its report.
FiREapps further reported that the negative impact added up to $19.29 billion (for those that quantify the impact. According to FiREapps that’s 13.8% higher than in Q2 2015, and nearly five times larger than Q3 of 2014.
FiREapps said that of the 61 companies that track currency impacts on earnings per share (EPS), the average impact was -$0.12. “Most leading MNCs have set a management objective for their FX managers of less than $0.01 in EPS impact, FiREapps said. “Even removing the five companies with the largest EPS impacts and the five companies with the smallest EPS impacts, the average is negative $0.05 EPS – still more than five times higher the less than $0.01 management objective.”
The dollar’s strength has had a lot to do with the currency volatility. And as reported in the The Year’s Top Takeaways from the December/January issue of iTreasurer, the impacts will be here for a while as the dollar is expected to stay strong for some time. At a 2015 meeting of The NeuGroup’s Assistant Treasurers’ Group 30 (AT30), sponsor Citi said it “expects the 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.”
This means there will be a need for proactive FX messaging to the board and management. After a long time of little to no explanation to external stakeholders necessary (or desirable) as a weakening dollar benefited them, dollar appreciation requires proactive messaging and metrics to show that the underlying business is performing, so investors don’t penalize the company’s stock unfairly for factors outside its control. Proactive messaging helps, especially if you are different from your industry peers.