COVID-19, Currencies and Clarity: A $12B Challenge for CFOs

Is it time for investors to demand more clarity from corporate finance chiefs?

The July 2020 Currency Impact Report from Kyriba reveals a startling spike in foreign exchange (FX) impacts, with quantified negative currency impacts above $12 billion for North American and European multinational corporations in Q1 2020. Despite the beginning of an economic slowdown, the quarter’s total currency impacts were up 37 percent, a significant increase from the previous quarter.

The contraction of the global economy accelerated by COVID-19 has impacted finance teams and treasury departments in unexpected ways. For the last three years, the currencies which CFOs have identified as the most impactful have been the euro, the Chinese yuan, and the U.S. dollar. In Q1, the most impactful currency for this term was, unexpectedly, the Brazilian real.

The Brazilian real’s leap to the most impactful currency to North American companies demonstrates how challenging this period has been for CFOs and treasurers. This volatility will likely continue until the global currency war subsides, and we will continue to see multinational corporations that lack insight into their liabilities suffer millions in losses as a consequence.

Clarity as a Solution

The rampant and rapid drop in market value, and the immediate stop of airlines, taxis and retail shops, drove unprepared companies to desperately seek transparency into their liquidity position. Companies that had invested in best-practice solutions to gain visibility into all of their currency exposures, determine the potential impact of FX and manage the associated risk, were better able to mitigate FX losses and saw minimal impacts on their earnings per share (EPS). These companies retained the MBO of less than $0.01 EPS at risk, while others reported an average $0.04 EPS at Risk in Q1 2020 earnings calls.

Then came the fraudsters. CFOs and CIOs preparedness was tested again as they transitioned their workforce to remote operations. And with that move to remote work, cybercrime increased in the financial sector by 238 percent during February and April, according to the head of cybersecurity for spyware technology company VMware. Given this increase in fraud attempts, investors may have a new indicator of corporate resilience to crisis and pandemic, seeing senior finance leaders who deploy best practice solutions to mitigate risks like FX impacts or payments fraud as more likely to retain EPS value and take advantage of inexpensive acquisitions in a down market.

The Way Forward

North American and European governments have flooded their respective economies with stimulus money, which runs the risk of a global race to the bottom for currencies. The virus, along with the consequences of the coming U.S. election, suggests it will be at least another year before currency volatility subsides.

It’s clear to see that the next few quarters will be equally, if not more, volatile than Q1. Multinationals should prepare to protect their payment flows and currency pairs and prepare to weather the storm. If you’re looking to be one of those multinationals that are prepared and can easily mitigate exposures no matter the state of the global economy, read our eBook on Automating Corporate FX.