Insight & Analysis

No room for complacency despite drop in FX volatility costs

Published: May 2023

A weakening dollar massively widened the gap between North American and European corporates’ losses from currency movements in the final quarter of last year.

The headline finding of Kyriba’s latest currency impact report makes for encouraging reading, with the collective quantified negative impact reported by North American and European companies totalling just over US$30bn in Q422, a 36% decrease from the previous three-month period.

But with North American corporates alone reporting FX losses of almost US$29bn, it is clear these businesses have suffered from the relative strength of the euro, the Canadian dollar, and the Japanese yen over recent months after a long period of dollar domination.

The euro was the most mentioned currency in the earnings calls of these companies. The Canadian dollar was the second most-mentioned, followed by the yen, the Australian dollar, and the Brazilian real.

The euro returned to the list of the most volatile G20 currencies for the first time since Q2, while the pound slipped to fifth position from third in the previous quarter. The Korean won, the Argentine peso and the Russian ruble were the currencies that experienced the greatest movement during the final three months of 2022.

The average earnings per share (EPS) impact reported by North American companies in Q422 was US$0.05, five times greater than the industry average. Companies in the professional services sector experienced the greatest impact from currency volatility.

The euro was the most mentioned currency in earnings calls for Europe, followed by the US dollar and the Swedish krona.

Kyriba acknowledges corporates tend to be rather coy when it comes to revealing the impact of currency volatility, noting in its quarterly reports that ‘impacts are likely underestimates as most companies with currency headwinds generally do not report them’.

However, a number of leading money transfer firms have referred to its effects. Last month, Wise attributed a fall in the volume of cash transferred across its platform to customers being unnerved by currency fluctuations, while earlier this month MoneyGram forecasted continued impact from currency volatility during 2023.

The complicating factor for corporates is currencies don’t always move in the direction they are expected to. For example, the sharp move upward in the US dollar two weeks ago was at odds with reassuring inflation and wage data coming out of the US according to Enrique Díaz-Álvarez, Chief Risk Officer at fintech Ebury.

He believes the pound should remain well supported in the coming weeks, while the trend downward in the US dollar may not be re-established until June.

Eric Huttman, CEO of multi-bank FX marketplace MillTechFX says the report highlights the threat posed to the bottom lines of many European and North American firms from US dollar volatility.

“Firms are typically not only hedging a higher amount of their exposure, but they are also reducing the length of their hedges,” he says. “Rather than using long dated FX forwards of up to two years, many corporates are now locking in rates of six months or less to give them flexibility should the market move against them.”

Rising interest rates and continued FX volatility are putting treasurers and CFOs in a very tenuous position adds Andy Gage, SVP of FX solutions and advisory services at Kyriba.

“Corporate treasury teams are realising they don’t have good visibility into their companies’ true exposures, which costs billions in losses to earnings and cash flow,” he suggests. “It is crucial for CFOs and treasurers to improve FX risk management practices to protect cash flow and liquidity.”

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