FX Volatility Has Only Moderate Impact

Currency fluctuations put a smaller dent in multinationals’ earnings in the third quarter of 2013. But are companies ready for a stronger U.S. dollar?

A stroke of good fortune or smarter FX management? In the third quarter of 2013, new data shows, many U.S. multinational companies either managed foreign-exchange risk better or saw FX volatility work in their favor. Regardless, according to the latest currency impact analysis by FiREapps, U.S. multinationals reported less of a hit to earnings from currency fluctuations.

Of the 846 publicly traded companies the software vendor analyzed, 205 reported negative FX impacts, down 12 percent from the second quarter and 3 percent below the 2012 quarterly average. Seventy-eight of the companies quantified the negative impact, which totaled $4.18 billion, well below the $22.7 billion total the group registered for the third quarter of 2012.

But most multinational companies are not managing the impact of FX fluctuations to within $0.01 of earnings per share, which is the benchmark many FX managers strive to hit. The average drag on earnings per share among the companies that disclosed EPS impact for the third quarter was $0.03 per share, identical to the two previous quarters, says FiREapps, declaring the effect “still large and material.”

Managing FX risk won’t get any easier in 2014, as many experts predict the value of the U.S. dollar will appreciate significantly against some major world currencies.

The currencies that companies cited most often as denting corporate earnings in the third quarter were the Brazilian real, the Japanese yen, the euro, the Australian dollar and the Indian rupee. (See chart here.) The real fell more than 10 percent against the U.S. dollar in the quarter, and the rupee as much as 14 percent. The Australian dollar dipped as much as 6.2 percent. The largest percentage of companies reporting FX impacts were in the auto and the medical equipment and supplies industries.

In 2014, U.S. dollar appreciation, which is much more likely than depreciation, “will hit hard the multinationals that are not prepared,” FiREapps said in its report. “The fundamental reason is the same as the reason corporates were so significantly impacted by the yen in 2013: as the U.S. dollar becomes relatively more expensive, U.S. exports become relatively less competitive in global markets, and the international revenue of U.S.-based multinationals gets eroded.”

The U.S. dollar will rise because “with the appointment of Janet Yellen as the new head of the Federal Reserve, there are expectations of a more inflationary environment — the kind of environment that would result in rising interest rates and increased attractiveness of the dollar,” says FiREapps.

Meanwhile, the euro and the yen are not poised to strengthen and indeed may weaken depending on central bank policy moves. A strengthening euro could halt Europe’s emergence from recession, “so the European Central Bank will likely do everything it can to keep the euro down,” FiREapps says. In Japan, continued weakness in the yen will be driven by Prime Minister Shinzo Abe’s strategy of weakening the yen to make Japanese exports more competitive. Because Japan’s rate of inflation is 1 percent, still below the Bank of Japan’s stated goal of 2 percent, further depreciation of the yen is likely.

To gauge FX impacts, FiREapps analyzes the earnings calls of a subset of the largest U.S. companies — those that have at least 15 percent or more of international revenue in at least two currencies.

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