Over the last four years, the challenges faced by treasurers have shifted significantly. We faced a pandemic, which acted as a catalyst for the sudden shift in the currency market followed by a global supply chain crisis, which resulted in businesses struggling to source inventory. All of which was kindling to fuel the next market challenge – inflation.
To counteract the impact of inflation, the US Federal Reserve and central banks increased interest rates, but with the US dollar strengthening in 2022, business earnings were impacted, which resulted in a challenging currency market. Further fuelling this shift is today’s ongoing geopolitical conflicts keeping the global community on edge, which inherently makes for a strained and challenging currency market.
To better understand how economic volatility and FX impact corporate earnings, Kyriba produces a quarterly Currency Impact Report, which looks at 1,700 publicly traded, multinational corporations in North America and Europe. The report revealed that the currency impact on earnings reported in Q4 2023 totalled $14.67bn with $6.8bn in headwinds and $7.87bn in tailwinds. Overall, in 2023, the yearly currency impact was $9bn, compared to $169bn in 2022. The reduced impact in 2023 was primarily due to generally weaker USD in 2023 compared with the year before.
Last year, the currency impact on earnings showed signs of healing when compared to 2022, however, it’s evident that a significant amount of uncertainty remains in the currency and interest rate market.
When it comes to North America, Kyriba’s report found that in Q4 2023, companies in the region saw a 62.7% decrease in headwinds amounting to $2.63bn and tailwinds of $9.63bn due to a 52.1% decrease. These companies were affected by the currency fluctuations, with an average earning per share of $0.04, compared with the industry standard. This headwind was likely a result of the dollar’s dip in that period as investors expected the Federal Reserve to drop interest rates.
Ongoing uncertainty around the major trading currencies and geopolitical shockwaves mean that treasurers need to proactively manage their foreign exchange risks
Another interesting finding is that manufacturing companies across a wide swath of industry sectors such as industrial manufacturing, health care device and equipment, life sciences and chemicals sustained the most notable currency impacts. This is in large part because of the complex internal and external supply chains that manufacturers rely on to build the products and deliver them to market.
These complex supply chains are moving inventory and finished goods throughout the world resulting in numerous internal and external FX transactions and exposures. This leaves them very vulnerable to FX volatility impacts to revenues, EBITDA and Earnings Per Share.
On the other hand, European companies reported a 53.5% decrease from the Q3, amounting to $4.17bn in FX related losses. 12.4% of the 850 Europe-based companies analysed, reported headwinds, and 25.7% of those measured their negative impacts.
Even with the lower overall aggregate impact, European firms sustained more negative headwinds than positive tailwinds as a result of relatively stronger euro and British sterling during Q4 of 2023. This is a trend that was very evident throughout 2023.
Now that we’re well into 2024, the unifying theme for treasurers and the currency risk management teams is ‘uncertainty’. Unfortunately, there is still uncertainty in terms of the major trading currencies and the ongoing impact of the rising geopolitical tensions that can quickly send shockwaves through the currency markets. Therefore, it’s vital that treasurers proactively manage such risks. Here are some practical options to do that:
Having said that, to enable such types of optimisation strategies, it’s important to leverage the right technology to support you along the way. Trying to decipher the copious amount of information received without the tools to properly understand the data could also lead to a gridlock.
Technology and AI solutions offer a helping hand in analysing this data and pinpointing exact financial problems while processing and clearing any issues. Relying on such trusted offerings means that vulnerability to currency headwinds is reduced, effectiveness of hedging costs is improved while FX transaction costs are minimised.
The foreign exchange market will continue shifting as economies across the globe develop. While treasurers can’t predict with 100% accuracy what the next wave of change will bring, there are tools available to ensure potential financial risks remain under control and most importantly that revenue is not impacted.
Andy Gage is SVP FX solutions and advisory services at Kyriba