Cash & Liquidity ManagementFXUnnecessary currency value losses soar in US organisations

Unnecessary currency value losses soar in US organisations

Less negative impact reported by European companies as American organisations suffer soaring losses driven by geopolitical events and dollar strength.

Collective currency value losses suffered by publicly traded North American companies have soared to $20.84 billion in the fourth quarter of 2018 – the highest figure since 2015.

The losses are the highest reported since 2015, and represent a 77% increase from the third quarter of last year when the collective loss was $11.81 billion, according to the latest Kyriba Currency Impact Report (CIR). The report, previously compiled by enterprise currency management specialist FiREapps, now a Kyriba company, is the most comprehensive of its kind in detailing the impact of foreign exchange (FX) exposures among 1,200 companies in North America and Europe.

The average negative currency impact per company inched up to $79 million in the fourth quarter from $52 million in the third quarter, while the number of North American companies reporting negative currency value impacts leapt from 265 to 301 quarter over quarter. Average EPS impact from this trend in the fourth quarter was $0.05, up 25% over the third quarter.

“The impact of North American headwinds represents the most significant currency hit to top-line revenue in the last 12 quarters,” said Wolfgang Koester, Kyriba’s chief evangelist. “As this is the second quarter in a row of very significant negative currency impacts, publicly traded North American companies should analyze their foreign exchange currency holdings and make necessary adjustments to improve their earnings per share performance.”

The medical equipment and supplies industry and the biotechnology and drug industry felt the greatest impact from negative currency adjustments as those industries were heavily affected by new Chinese government tariffs.

“While China’s devaluation of the yuan played the primary role in currency value losses in 2015, this time the ongoing U.S.-China trade war, as well as other geopolitical events such as Brexit, have had the greatest negative impact on currency holdings,” added Koester.

European firms more positive

On a more positive note, publicly traded European companies moved in the opposite direction as North American companies, with less negative impact from currency adjustments. In the fourth quarter, European companies experienced a collective loss of $3.08 billion from negative currency impacts, down from a $3.8 billion loss in the third quarter.

Industries managing supply chain uncertainties resulting from Brexit bore the brunt of the negative currency adjustments among European industries – with auto and truck parts, as well as chemical manufacturing, hit hard.

“Throughout 2016 to 2018, currency impacts to North American companies were pretty low while European companies had climbing impacts,” Koester said. “Now, we have the opposite trend, and part of the reason is companies generally don’t manage foreign exchange well during periods of low volatility. The lesson here is companies should be paying attention to and managing their foreign exchange exposures at all times because they never know when currency volatility will hit them as it now has again for North American companies.”

According to Koester, corporations should take the following steps to manage the potential volatility of individual currencies and improve their financial performance:

  • Benchmark their currency impacts against the marketplace
  • Manage their exposures for each currency pair
  • Increase hedge ratios

To compile the report, Kyriba analyzed the Q4 2018 earnings calls of 1,200 publicly traded North American and European companies as part of a continued effort to provide insight into how foreign exchange impacts organizations. The companies included in this data set are large multinational firms doing business in more than one currency with at least 15 percent of their revenue coming from overseas.

The full report is available to download here.

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