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Geopolitical Uncertainty, Lack of Insight Drive Big Currency Losses

By Kyriba

The recent Kyriba Currency Impact Report, released May 1, shows North American companies sustained $20.84 billion in negative currency impacts in Q4 2018. But what was the cause behind the most significant North American impact in 12 quarters?

Which Currencies are Impacting Companies?

currency pie chartFirst, it is important to understand which currencies are creating headwinds. Through analyzing the earnings calls of 850 publicly traded North American companies, the Kyriba Currency Impact Report (CIR) documented the currencies most mentioned as impactful in Q4 2018.

For the eighth consecutive quarter, the euro was most referenced as impactful, while the Chinese renminbi was second most referenced for the fourth quarter in a row. Additionally, in a trend that began in Q1 2018, Latin American currencies continued to make the list, followed by the Canadian dollar and British pound.

While this analysis is essential to understand which currencies are affecting corporate earnings the most, it is even more vital to know what events are driving these currency impacts.

Main Currency Volatility Drivers

Geopolitical Uncertainty

Currently, geopolitical events such as the U.S.-China trade war and ongoing uncertainty about Brexit are likely a major cause of the increased headwinds. Additionally, the continued strength of the dollar and volatile movements in Latin American currencies are also playing a factor.

As mentioned above, the Brazilian real (BRL) and Argentine peso (ARS) were among the top five currencies most mentioned as impactful during North American companies Q4 2018 earnings calls. Part of this is due to the fact that while many companies manage against the currencies they do the most business in, they are not hedging against smaller currencies in their portfolio – and oftentimes, those currencies are the ones prone to volatile moves that result in significant impacts.

Lack of Insight into Currency Exposures

What can be seen in the most recent report’s findings is that the number of companies reporting impacts increased in direct correlation to the amount of reported headwinds – meaning that as more companies suffered FX-related headwinds, more companies were mentioning the impact of currencies during their earnings calls. While it may seem natural for more companies to be talking about FX when there are larger impacts, that’s not necessarily true for every company.

Some multinational corporations didn’t experience FX-related headwinds on the same level as many of the companies that reported losses in Q4 2018. This is because they are not left surprised by impacts from specific currencies – they either accounted for a certain amount of that risk or managed against it entirely.

What corporate treasury teams and CFOs need to know is that currency volatility does not have to lead to impacts. Often, it is the lack of visibility that leads to under-hedging.

With access to accurate, complete and timely account balance data, treasury can have direct visibility into all of their currency exposures and thus increase their hedge ratios and manage their entire basket of currencies. In doing so, companies can protect themselves from unforeseen movements in currencies that result in headwinds.

The Bottom Line

The steep increase in negative FX impacts to North American companies in Q4 2018 solidifies the continued importance for multinationals to manage their FX risk – clearer insight into exposures leads to less negative financial impact from currency fluctuations.

Download the Kyriba Currency Impact Report now and use it as a benchmarking tool to understand how your company compares to the rest of the marketplace and request a demo to learn more about how you can avoid FX impacts to your earnings.