Cash Management

Currency Moves Dent Multinationals’ Earnings

Foreign-government devaluations and political uncertainty shaved second-quarter profits for some U.S. companies, and exchange-rate volatility is co...
Vincent RyanSeptember 19, 2013

Exchange-rate fluctuations cut into U.S. multinationals’ earnings in the June quarter, a trend expected to continue in the third quarter as some key world currencies remain volatile relative to the U.S. dollar.

Currency risk management vendor FiREapps, in its regular quarterly report, said that 233 companies recorded negative currency effects in the second quarter. Ninety-five of the 233 actually quantified the hits. The total was $4.1 billion, an average of 3 cents per share. 

While the cumulative earnings impact was lower than that experienced in the second and third quarters of 2012, FiREapps says, it was 12 percent higher than the first-quarter’s. The result reflects “currency wars in Latin America and Japan and ‘surprise’ impacts from countries like Australia,” according to the vendor.

The yen shaved the profits of 84 companies in FiREapps’ 800-company sample, the most of any currency. (Click here for a chart of the data.) The Japanese currency fell 5.4 percent against the U.S. dollar last quarter, producing negative effects on earnings for the third straight period. The yen is down about 12 percent in 2013 as result of the Japanese government’s devaluation strategy.

Devaluations of the Venezuelan bolivar and the Brazilian real hurt the profits of 46 multinationals in the second quarter. The real declined 7.8 percent relative to the U.S. dollar in the second quarter. However, it has rebounded since.

The Venezuelan bolivar was flat against the dollar in the second quarter after falling 32 percent in the first quarter.

For the first time since FiREapps started tracking, the Australian dollar was among the top-cited currencies by companies reporting exchange-rate effects. Fears over upcoming federal elections unexpectedly knocked 12.3 percent off the Aussie dollar in the second quarter, says FiREapps.

The volatility spurred by Australia’s political climate does not bode well for the prospect of greater euro volatility this fall, potentially set off by Germany’s national elections, says FiREapps. 

“Uncertainty about the political climate and economy in general can lead to currency devaluation as traders look for safer currencies to hold their cash in,” FiREapps says in its report.

“The stakes of politics are much higher in the euro zone than in Australia,” FiREapps points out. “The outcome of the German election has potentially enormous ramifications for the fate of the euro zone and certainly the value of the euro.”

The euro tracked between 1.28  and 1.34 to the U.S. dollar last quarter, and the volatility was cited by 30 companies in the FiREapps sample.

Going forward, competitive currency devaluations in Japan and Latin America will continue to affect multinationals’ bottom lines through the rest of 2013 and 2014, predicts FiREapps.

The risk management vendor expects that the Indian rupee and the Russian ruble will be among the leading sources of FX headaches for companies. “In the third quarter to date, these currencies are already impacting corporate earnings, even though companies are not yet reporting those impacts,” says FiREapps. 

Before Wednesday, when the Federal Reserve announced its decision not to taper its bond-buying program, the Indian rupee had fallen 10 percent against the dollar this quarter. The Russian ruble also has been marked by “dramatic volatility,” FiREapps says.