Currency Headwinds Lighten But Unlikely to Remain So: Report

The latest quarterly report from Fireapps shows that
currency headwinds for those corporations that reported them fell to $6.7
billion in Q1 2017 – mainly thanks to North American firms reporting a $6.47
billion negative currency impact on earnings. This compares to a collective
$16.88 billion hit in Q1 2016, the firm says.

Fireapps analyses
the earnings calls of 1200 publicly traded North American and European
companies and says the companies included in the dataset are large
multinational firms with at least 15% international revenues in at least two
currencies.

The report
notes how, over the last five quarters, FX volatility has been higher than in
2013 and 2014 – a period of low volatility that was followed by a $14.66
billion increase in negative currency impacts between Q3 2014 and Q4 2014. “Looking
to previous quarters, there is a pattern of low volatility followed by a steep
increase in volatility and negative currency impact,” the firm warns.

Of the 850
North American-based multinational corporates that Fireapps analysed 213 reported
negative currency impacts, 13.1% lower than Q4 2016. This represents about 25%
of the data set reporting a negative impact from currency.

“This
decrease in volatility is a dramatic drop from Q1 2016, but continues a pattern
of low volatility that has occurred the last few quarters. Still, 25% is
notable as it shows only a slight negative deviation from last quarter’s 29%,”
says Fireapps in the report.  

It adds
that the average negative EPS impact reported by the 32 quantifying companies
was $0.03. “As a point of reference, leading multinationals have set a management
objective for their FX managers of less than $0.01 in EPS impact,” the report
states.

Meanwhile 15
of the 400 Europe-based multinational corporates reported negative currency
impact and of these companies that actually quantified the impact, total losses
amounted to EUR 211.1 million. Fireapps says that 29 companies reported
positive currency impacts in the fourth quarter (up 11 from in Q4 2016).

In the
first quarter of 2017, 13.6% percent of European corporates reporting currency
impact fielded questions about currency impacts from analysts during their
earnings calls (this number was 16% for North American corporates). This is the
fifth quarterly decline in a row. “Corporate leaders must be prepared to answer
analysts’ questions about the steps they are taking to mitigate currency
impact, for all currencies on which the company is exposed,” Fireapps says in
the report.

It adds in
a warning, “The decrease in the number of companies reporting shows that many
multinationals are still not aware of what their risks are and have been lucky
to sustain only minor impacts during the last few low volatility quarters.
However, those who are not managing their FX risk and hedge ratios will likely
be caught off guard by a spike in volatility that is sure to come.”

Colin_lambert@profit-loss.com

Twitter
@lamboPnL

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@Profit_and_Loss

Colin Lambert

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