The combination of the currency war between the US and China alongside Brexit uncertainty has led to a record period of currency volatility, creating a collective negative currency impact of $22.5bn for North American and European corporations, according to the latest Kyriba Currency Impact Report (CIR).
The report, which details the impact of foreign exchange (FX) among 1,200 companies in North America and Europe, found that global currency swings had cost US-listed multinational corporations more than $21bn in Q2 2019, the third consecutive quarter of $20+bn losses – the longest stretch in a decade. The total negative impacts sustained by European corporations was $1.5bn
“Currency volatility is having real, quantifiable consequences for companies. CFOs who dismissed this problem as a temporary wave of market drama need to reconsider their approach,” said Wolfgang Koester, Chief Evangelist for Kyriba. “They need to adopt modern tools to measure, monitor and manage their currency exposures accurately and in real-time, or risk facing more quarters of substantial losses.”
Koester said that treasurers had to be aware of their exposures in an accurate and timely fashion, while having a plan in place to deal with their exposures would help reduce the impact of this period of currency volatility.
Of the 1,200 companies studied, 316 companies – 291 in North America and 25 in Europe – reported negative currency impacts. Koester said that the companies struggling were those who hadn’t embraced technology.
“In short, they are not digitalised and still have manual processes in place that hinder them.
“CFOs and treasurers need to improve their currency risk management strategies, or they will continue seeing negative currency impacts in this volatile environment. Companies that are not employing an active liquidity strategy, those who are not locking down risk, will be more likely to see negative impacts to earnings per share,” he added.
For the tenth consecutive quarter, North American companies indicated the euro as the most impactful currency, with 44% of companies mentioning it during their second-quarter earnings calls, according to the report.
Medical equipment and supplies and the business services industries experienced the greatest impact from currencies, as those industries continue to be affected by Brexit and other volatile geopolitical events around the globe.
Currency impacts still a problem in Europe
Publicly traded European companies monitored in the Q2 2019 report indicated a collective currency loss of $1.55 billion, the eighth consecutive quarter of $1 billion impacts. The euro topped the list as the currency most mentioned as impactful by European companies during Q2 2019 earnings calls, closely followed by the U.S. dollar, Chinese yuan and Brazilian real.
Issues will continue into Q4
With both US and China issue and Brexit unresolved, Kyriba said that they expected the impacts to continue into Q4.
“We don’t see currency exposures ending any time soon with trade wars, geopolitical tensions and Brexit taking their toll on corporates’ bottom line,” said Koester.
However, he also felt that negative currency impacts were an entirely avoidable scenario for Treasurers in the modern world.
“Multinational corporate CFOs and treasury leaders have the tools and strategies available to them now to significantly mitigate if not eliminate currency exchange impacts to corporate earnings.”
Koester also hinted that major changes were afoot and that companies which hadn’t already digitized would be made to pay for their slow uptake.
“When currencies demand full digitalization, which is coming much sooner than people realize, multinational corporate finance leaders will have to pay make the necessary changes to manage payments in real-time. Expect major changes in early 2020,” he said.