Insight & Analysis

Corporates on both sides of Atlantic face dollar dilemmas

Published: Nov 2021

Multinationals are increasingly reluctant to reveal the precise impact of currency fluctuations on their bottom line.

Bamboo on either side of the street

In October, Kyriba published its latest currency impact report assessing the impact of currency volatility on the earnings of North American and European corporations during the second quarter of 2021.

The headline finding was that North American and European companies reported a combined US$4.25bn in quantified negative currency impacts in Q2 2021, a figure that was 55% lower than in the first three months of the year.

To put this figure in perspective, the equivalent loss for the same period in 2020 was just over US$17.5bn, while the number of companies reporting negative currency impact was more than five and a half time higher in April-June 2020 than it was in the second quarter of this year.

Kyriba caveats its findings by pointing out that the impact of volatility is likely to be an underestimate as most companies with currency headwinds do not report them.

“North American corporations leverage the EUR and GBP as their primary trading currencies and these currencies strengthened in the last quarter,” explains Wolfgang Koester, Senior Strategist at Kyriba. “Many corporate CFOs and treasurers who manage risk are unlikely to have the same benefit to earnings in Q3 2021 as the currencies’ shift in value is setting up a return of relatively strong headwinds for the Q3 earnings season.”

The euro was the most important foreign currency for North American multinational corporates (replacing the renminbi) while the US dollar was unsurprisingly the most impactful currency for European companies.

The most volatile G20 currency during Q2 2021 was the Indonesian rupiah, as it was during the previous two quarters. The Chinese renminbi and the Indian rupee also featured prominently in the list of currencies that showed the greatest movement during the first half of the year.

The Canadian dollar was the second-most mentioned currency among North American companies between April and June this year. In Q2 the Canadian dollar sharply rose in value against the US dollar, similar to what it did against the euro and pound sterling.

“This is a unique instance of the Canadian dollar being mentioned as impactful to North American corporations and is an example of how much volatility we are seeing in the market across all currencies,” says Koester.

One of the most interesting findings of the report was that the percentage of North American companies reporting currency impacts that fielded analyst questions during their earnings calls continues to fall – it is now just 4% compared to 25% at the end of 2018.

The figure for European companies is only slightly higher at 5%. However, the percentage of companies that quantify the impacts of FX volatility is much higher in Europe, at 82% compared to 46% in North America.

The average quantified negative currency impact was just over US$145m for North American companies and slightly more than US$91m for their European counterparts.

Koester reckons corporates are just starting to understand the full impact of navigating a connected, global financial ecosystem, which underlines the importance of treasurers understanding their cash flows on a daily basis and how to inject liquidity across their supply chain to reduce risk of supplier default.

“Risk managers have increased their FX hedging efforts to adjust for new challenges and those who have a unified and fully integrated platform to manage liquidity, risk and working capital exposures will be able to navigate these unique challenges with more confidence,” he concludes.

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