Risk Management

CFOs on Currency Prices: What’s the Value?

Almost a quarter of U.S. finance chiefs think the U.S. dollar is overpriced, according to the latest Duke University/&splt;i>CFO&splt;/i> Magazine ...
Vincent RyanMarch 20, 2013

Should U.S. CFOs care about what European CFOs think about the value of the euro? Short of that, should they even bother about whether other U.S. CFOs believe the dollar is currently fairly valued? 

The question matters, because in the latest Duke University/CFO Magazine Global Business Outlook Survey, despite the greenback’s recent six-month high against a basket of foreign currencies, 60% of U.S. finance chiefs surveyed said the dollar is correctly valued.

Is there any conclusion we can draw from this? The numbers from CFOs in Europe are also intriguing. Thirty-two percent of respondents to the European version of the Duke/CFO study believe their home currency is overpriced, despite the euro’s 7% weakening since February 21. And in both Europe and the United States, the respondents who chose “overvalued” think their home currency needs to depreciate by more than 10%.

Some find it relatively easy to dismiss CFOs on this subject, for two reasons. First, in countries where free trade reigns, the currency markets “are the most efficient on the planet,” Ryan Gibbons, managing partner at GPS Capital Markets, told me on Tuesday. Anyone’s ability to “predict [value] or arbitrage currency pairs based on their opinion” needs knowledge of all the variables, and there are just too many variables that go into currency prices. Price swings come from politics, the economy, rumor, and a multitude of other quarters. “If you look at 100 variables, you may miss the 5 others that the market is keying on today,” Gibbons adds. “Were we keying on Cyprus a month ago? We were yesterday.”

Second, it’s evident from the survey numbers that some CFOs answered the question (it’s the first time we asked it) based on their economic self-interest. Electronic manufacturers in Japan typically support a weak yen to drive up sales of exports in the United States, for example. So despite the 10% weakening of the Japanese yen since December 2012, 66% of CFOs in Japan said it’s fairly valued. Twenty percent even indicated it’s overvalued, and that the right level is 99.5 yen to the U.S. dollar, up from an intraday price Wednesday of 95.08.

So, it’s safe to say that the results of the Outlook survey’s questions will not have much influence on currency markets. Currency experts go further. From a risk-mitigation standpoint, finance chiefs shouldn’t even care what their peers believe about a currency’s value, or even take an opinion of their own, some say.

Thinking about relative value between currency pairs is not the CFO’s job, explains Wolfgang Koester, chief executive of FiREapps. Most U.S. corporations don’t hold off on hedging the Venezuelan bolivar, for example, because it has depreciated 50% and they think the next move is up, he says. The currency markets are way too volatile for companies to time them, and most companies don’t have large enough treasury staffs to even attempt it. (Especially when the company is exposed to 100 currency pairs, which is not uncommon.) 

So nowadays, once a company knows its exposure and risk tolerance, it immediately goes out and hedges, says Koester. In case that argument needs any bolstering, in quarterly and annual reports CFOs attest that they are not in the business of speculating on foreign exchange (FX), but instead are in the business of mitigating risk, he points out.

Koester is right for the most part. But there are other views that suggest CFOs probably pay more attention to FX trends than we think, and some are very likely taking a position on the future performance of, say, the U.S. dollar against the euro.

Operating across the globe, CFOs are highly attuned to big moves in currency-pair prices of the major economies, especially when those moves are large, says Gibbons. And that’s happening right now, given that the dollar’s appreciation could put a hurt on some company’s results this quarter.

“CFOs are starting to look at their preliminary Q1 results and the FX gains and losses on their financial statements, and they are going to know whether they were hedged correctly,” Gibbons says. “And they are going to have to explain that to shareholders.” Given that, some CFOs may be more knowledgeable about market valuations than the experts think.

The other point is that while currency speculation is unwise, and so is trying to time the market, forming an opinion on what the company’s functional currency will do in the next “X” months (and how volatile it will be) can be part of hedging. Companies can’t affordably protect against all possible price fluctuations in the U.S. dollar, so as well as understanding risk tolerance they need a position on how severe a price fluctuation to protect their cash flow, margins, and assets from. I live only a few miles from the East River, but I think the chance of a tsunami destroying my house is so remote that protecting against it is not worth my time or money.

I’m not taking either side in the currency trend-awareness argument. But it’s certainly true that CFOs who are fully aware of their FX risks are, well, better CFOs. And maybe CFOs do have something to say about currency markets, something worth listening to. But I don’t think it’s whether a currency is correctly valued versus undervalued versus overvalued. (Mulligan, please.)

You and I want to know how companies are behaving in relation to FX risk, because executives don’t always act in accordance with their opinions. Unfortunately, the specific hedges IBM or any other company has on the yen today or in the future are not ever likely to be disclosed publicly. But perhaps we can get CFOs to answer an anonymous, deep-dive survey about their hedging behaviors. That might be a data set very interesting to other CFOs and anyone else involved in the forex markets.