Cash & Liquidity ManagementFXQ3 earnings affected by $12bn in FX headwinds

Q3 earnings affected by $12bn in FX headwinds

Seven consecutive quarters of currency impacts above $10 billion, uncertainty a contributing factor.

The third quarter of 2019 brought about $12.29bn in quantified negative currency impacts for firms in North America and Europe according to a report released by Kyriba.

North American firms accounted for 94% of this amount, with negative quantified impacts valued at $11.55bn and European firms reporting currency headwinds valued at $740m. But Wolfgang Koester, Senior Strategy Officer at Kyriba says this statistic can be slightly misleading.

“North American firms in general are ahead of transparency on reporting on their foreign exchange impacts. There is a lag in Europe for quarterly reporting on foreign exchange. North American companies have come and said, ‘we need to continue to be transparent and keep talking about what the impacts are, be they smaller or larger’. The Europeans feel that still that the materiality threshold is on average higher from a reporting requirement point of view”.

On average, North American firms reported negative currency impacts of $44.4m as opposed to Europe’s $82.5m. This suggests European firms are less forthcoming about their currency headwinds, only reporting currency impacts when they reach a notable threshold

Euro’s volatility

The euro has once again been found to be the most volatile currency as weighted by percentage of global GDP for Q3 2019. Over the past four quarters the euro was either the most or second most volatile currency. The euro and Chinese yuan have traded first and second place over the past four quarters.

While it may be easy to chalk up the euro’s volatility to Brexit uncertainty, the underlining political and economic conditions of the bloc are likely down to a larger factor says Koester: “While everybody’s clinging onto the Brexit explanation. I think it was more about the political and trade and therefore economic instability that’s that Europe is going to see this year.

“I think that people have categorically been able say ‘It’s Brexit’ but, they’re not watching what’s going on with Merkel, what’s going on with EU trade and what’s going on with the bloc’s economy”.

Given the Euro’s volatility, companies on both sides of the Atlantic note the impact it is having on their financial statements, nearly half (46.2%) of North America firms pointed to the euro as the most impactful, while just over a quarter (26.7%) of European indicated the same.

Pessimism for 2020

Currency instability is expected for the months ahead. Within the eurozone there is still uncertainty and Koester expects currency volatility to pick up. “There exists further instability politically. What’s going on with Germany?  Is Merkel in or out, or more out than in? and then what’s going on in France?

“Then what’s also happening from an interest rate environment. There’s not much room to drop rates further. They’re [Some EU states] are already partially in negative rates.

This year will be another year of high volatility, “I believe that volatility and the global economics is still not that stable. Volatility is going to stay up and with that losses are going to stay up.

“You’re going to end up seeing continuous and increasing volatility throughout the year on currencies in general and certainly on the euro”.

Hamish Muress, Senior Currency Strategist at OFX is equally pessimistic, he wrote that while Brexit has happened, there still exists uncertainty in regards to the UK’s future relationship to the EU “As we march on towards the December 31 [transition] deadline, volatility will certainly pick up as investors brace themselves for the possibility of a No-Deal”.

Elsewhere globally, the phase one deal between China and the US was a step towards greater economic stability but more recent global developments may very well erase the stability gains of the agreement.

“The Phase One deal between China and the US had gone some way to calm investor fears about Chinese and regional growth prospects. However, the recent outbreak of coronavirus, which was declared a global health emergency by WHO, will undoubtedly impact output. This will weigh heavily on key commodity currencies like the Chinese renminbi, Australian dollar and New Zealand dollar, which could be in for a rocky road ahead”.

 

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