FiREapps says US-based global companies continue to get hit by a strong USD.
Dollar strength hits to US and European multinational earnings reports is as bad as it was during the euro crisis, according to a report from currency analytics company FiREapps.
For corporate treasuries, strengthening dollar is an opportunity to review how well the current hedging approach is working and whether any of the levers (hedge ratio, tenor and instrument) can be adjusted to better mitigate the effects of an appreciating US dollar.
In FiREapps’ latest quarterly survey, the Q1 2015 Currency Impact Report, companies lost $31.68 billion in the first quarter of 2015, which is 57 percent higher than in 2014 Q4. On their own, North American corporates lost $28.94 billion.
It’s no wonder FX remains a top priority for corporate treasuries, according to benchmarking in the NeuGroup universe of treasury peer groups. And the dollar’s strength and these negative impacts could another several years, according to FiREapps. The company cites Morgan Stanley’s Hans Redeker, who thinks the dollar is only about halfway through what Morgan Stanley calls a super-cycle, which is similar to other large moves going back to the 1980s.
Previous super-cycle rallies “lasted about seven years and involved gains of around 50 percent on average,” FiREapps said, and since 2012, the buck has strengthened 23 percent (according to the Bloomberg Dollar Spot Index) against a basket of 10 currencies including the euro and yen.
Also cutting into corporate earnings is volatility according to FiREapps. And it expects the volatility to continue as long as central banks keep tinkering with the market. “For global financial markets, central bank intervention creates uncertainty, and that creates volatility,” FiREapps said. “Given how tightly interconnected global economies and financial markets are, the actions of one central bank have ripple effects around the world. Those actions affect other economies, and they affect multinational corporations.”
For US MNCs the euro is creating the most volatility impact. According to FiREapps research, 142 North American MNCs mentioned the euro as “impactful,” along with the yen (82 companies), and the Russian ruble (58 companies).
“As long as economies around the world remain weak and central banks there see intervention as a successful stimulus tool, then we should expect to see continued currency volatility,” according to FiREapps.