By Bill Camarda
To see how significant currency risk can be, consider how some U.K. companies have been impacted by the deteriorating value of the pound sterling (GBP) they use to make key purchases. For example, the airline EasyJet reported before-tax earnings of £495 million in 2016, a decrease of £191 million from 2015 – but that figure reflected £88 million in “unfavourable movement from foreign exchange.”1
While currency risk impacts aren’t always this large, they are often significant. According to currency risk analytics software provider FiREapps, in the fourth quarter of 2016 245 out of 850 U.S.-based companies surveyed reported negative currency impacts, averaging $0.04 per share. FiREapps notes that many enterprises have set a “best-practice” goal of limiting currency risk impact to just $0.01 per share, so four cents is quite meaningful. It can make the difference between meeting or missing analysts’ targets.
According to Seeking Alpha’s analyst earnings call transcripts, companies reporting currency risk headwinds during the first half of 2017 include:
For enterprise finance teams, managing currency risk is made more difficult by the increasing speed of exchange rate shifts. Currencies are more likely to reverse direction faster, demanding greater agility from managers who must quickly move from planning for rising to falling currency values (or vice versa). As FiREapps puts it, “currency cycles are now measured in quarters, not years.”7
The most volatile currencies can also change rapidly. In 4Q16, the most volatile G20 currencies were the South Korean won, the euro, the Turkish lira, the Indonesian rupiah, and the Australian dollar; in 3Q16 they were sterling, the Russian ruble, Argentine peso, Brazilian real, and Indonesian rupiah. Only Indonesia’s currency appeared on both lists.
Sometimes, the shifts happen even faster. As Global Finance Magazine notes, volatility in global currency markets was actually “at unusually low levels” during the second quarter of 2016, until the markets were surprised by the U.K. vote to leave the EU. The pound’s value dropped precipitously less than a week before the quarter ended – “catching many multinationals off guard.”8
Small and medium enterprises (SMEs) finding it challenging to understand the impact of currency risk on their businesses may take comfort in knowing they are not alone. FiREapps believes even more large companies are struggling with currency shifts than report the problem publicly. Those “that did not disclose headwinds in Q4 2016 most likely did not report because they are not confident in their data… when faced with the risk of reporting materially incorrect numbers they chose not to report at all… [since reporting] requirements are lax in this area.”9
Other recent executive surveys may lend support to this hypothesis. For example, a 2016 Deloitte survey found that “lack of visibility into FX exposures… is a challenge for nearly 60 percent of [executive] respondents. This challenge is pervasive… Without accurate measurement… value erosion from negative currency rate movements cannot be minimized.”10 A 2017 Treasury Strategies survey found that FX and financial risk management issues trailed only cash management amongst corporate treasurers’ top priorities and benchmarking concerns.11
It’s also the case that some companies benefit from currency “tailwinds” that increase their profits. In late 2016 and early 2017, companies reporting this pleasant event include:
Small, medium, or large enterprises that do business globally can experience mixtures of currency tailwinds and headwinds. For example, News Corporation – the global media firm with roots in Australia and the U.K. that owns Dow Jones & Company – says risk from shifting currency reduced its revenues by $21 million in the most recent quarter, “with modest year-over-year improvement in the Australian dollar” more than canceled out by the pound’s weakness. Despite its overall currency losses, NewsCorp actually earned $6M from favorable foreign currency fluctuations associated with its Australian real estate advertising business, and similar shifts boosted its cable network programming business.16
So, too, a company’s exposure to currency risk may change dramatically in the wake of major events such as acquisitions or divestments. For example, Treasury & Risk reports that when eBay spun off PayPal in 2015, it lost many natural hedges that existed when these very different businesses were unified. Mitigating euro-dollar exposures now requires a “highly complex” corporate finance project encompassing a wide array of business functions and stakeholders.17
Due to currency risk from rising exchange rate volatility, international businesses face increasingly complex challenges in managing their financial performance. Currency-related “headwinds” or “tailwinds” can powerfully impact short-term results, requiring attention from both executives and investors.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1.Investing In Our Strengths: Annual Report and Accounts 2016, EasyJet PLC; http://corporate.easyjet.com/~/media/Files/E/Easyjet/pdf/investors/result-center-investor/annual-report-2016.pdf
2.“FiREapps Q4 2016 Currency Impact Report: A Survey of North American & European Corporate Earnings,” FiREapps; https://www.fireapps.com/download/?id=1040
3.“Alphabet (GOOG) Q1 2017 Results - Earnings Call Transcript,” Seeking Alpha; https://seekingalpha.com/article/4066436-alphabet-goog-q1-2017-results-earnings-call-transcript
4.“Estee Lauder Cos. (EL) Q3 2017 Results - Earnings Call Transcript,” Seeking Alpha; https://seekingalpha.com/article/4068674-estee-lauder-cos-el-q3-2017-results-earnings-call-transcript
5.“Hewlett Packard Enterprise's (HPE) CEO Meg Whitman on Q2 2017 Results - Earnings Call Transcript,” Seeking Alpha; https://seekingalpha.com/article/4077885-hewlett-packard-enterprises-hpe-ceo-meg-whitman-q2-2017-results-earnings-call-transcript
6.“VF (VFC) Q1 2017 Results - Earnings Call Transcript,” Seeking Alpha; https://seekingalpha.com/article/4066763-vf-vfc-q1-2017-results-earnings-call-transcript
7.“FiREapps Q4 2016 Currency Impact Report: A Survey of North American & European Corporate Earnings,” FiREapps, https://www.fireapps.com/download/?id=1040
8.“Best Corporate FX Teams 2017,” Global Finance; https://www.gfmag.com/magazine/january-2017/currency-risk-managers-tame-volatile-markets
9.“FiREapps Q4 2016 Currency Impact Report – What the Details Tell Us,” FiREapps; https://www.fireapps.com/fireapps-q4-2016-currency-impact-report-what-the-details-tell-us/
10.Continued Evolution: 2016 Global Foreign Exchange Survey, Deloitte; https://www2.deloitte.com/content/dam/Deloitte/sg/Documents/finance/sea-fas-2016-global-fx-survey.pdf
11.2017 Corporate Treasury Priorities: A New Starting Line, Treasury Strategies; https://www.treasurystrategies.com/wp-content/uploads/2017/02/2017CorpTreasPriorities.pdf
12.“Daimler sees currency tailwinds higher than 500 mln eur,” Reuters; http://www.reuters.com/article/daimler-results-currency-idUSL8N1HY1NH
13.“First Half Pre-Close Trading Update 2017,” British American Tobacco; http://www.bat.com/group/sites/uk__9d9kcy.nsf/vwPagesWebLive/DO72TJQU/$FILE/medMDANAM9R.pdf?openelement
14.“Earnings Preview: GlaxoSmithKline Likely to See Currency Boost; Advair Sales in Focus,” The Street; https://www.thestreet.com/story/13992272/1/earnings-preview-glaxosmithkline-likely-to-see-currency-boost-advair-sales-in-focus.html
15.“WPP Currency Tailwinds Add Over 10% Growth,” BrandUK.net; http://www.branduk.net/wpp-currency-tailwinds-add-over-10-growth/
16.“News Corporation's (NWSA) CEO Robert Thomson on Q3 2017 Results - Earnings Call Transcript,” Seeking Alpha; https://seekingalpha.com/article/4071464-news-corporations-nwsa-ceo-robert-thomson-q3-2017-results-earnings-call-transcript
17.“Adventures in Financial Risk Management,” Treasury & Risk; http://www.treasuryandrisk.com/2017/03/22/adventures-in-financial-risk-management