Currency Impacts: Now and into the Future

For years, currency analytics provider FiREapps—which was acquired by Kyriba two years ago—has analyzed the quarterly earnings calls of large public companies in North America and Europe. The goal of these analyses is to identify how many of the calls include comments by executives on the impact foreign exchange (FX) has had on the business’s financials.

Released last month, the company’s latest “Currency Impact Report” covers Q3/2020 earnings calls of 1,200 organizations that derive at least 15 percent of their revenue from overseas. Its key finding is dramatic: The proportion of executives who commented on currency impacts fell from 290 (24 percent) of the 1,200 companies studied in Q2/2020, to 117 (less than 10 percent) of those in the Q3/2020 report. In fact, the proportion of companies mentioning currency impacts on their earnings calls in Q3 was less than half that of any other report from the past two years. The shift was particularly profound for North American companies, which fell from 246 referring to currency impacts in Q2/2020 to 69 mentioning currency impacts in Q3/2020.

Treasury & Risk recently spoke with Wolfgang Koester, former CEO and co-founder of FiREapps who’s now chief evangelist for Kyriba, about how treasurers of multinationals should leverage the findings of the January report to prepare their business for the future.

Treasury & Risk:  What do you make of the fact that the number of companies mentioning currency impacts in their earnings calls fell so far in the third quarter?

Wolfgang Koester:  These analyst calls are all about what has materially impacted the business that quarter. Quite frankly, a lot of North American corporates got lucky in Q3. This was one of those unusual cases where we saw a pretty straight, single-directional, non-volatile move of one currency [the U.S. dollar] against many, and it persisted throughout the quarter.

Currency impacts aren’t just about day 1 and day 90, they’re about every single day throughout the quarter, when the company is receiving and making payments. And in Q3 of 2020, U.S. corporates saw FX move only in their direction. FX didn’t have a material impact on these companies’ financials, and therefore the analysts were focused on other areas.

T&R:  Was part of this that, in the middle of the Covid crisis, the corporate executives just had bigger issues they needed to address with analysts?

WK:  No, foreign exchange is a very quantifiable indicator of how companies are managing their liquidity, and in the third quarter, liquidity was top-of-mind for every analyst and every CEO. It still is: Most executives recognize that liquidity is the lifeblood of their company right now. So, for any companies where FX was having a material impact on earnings in Q3, that was going to be a topic the analysts brought up.

In fact, across both North America and Europe, when FX had a material impact, analysts were using currency issues to figure out how good management was at understanding and managing liquidity. And they were looking at liquidity as a means of figuring out the fundamentals of the business. It was interesting.

Material currency impacts will inevitably come back. We haven’t seen a quarter like Q3 in a long while, and we won’t see another quarter quite like it again soon. It would not be a good strategy to count on FX risk to stay so low. As currency impacts re-emerge, they will clearly demonstrate which companies are managing risk properly.

T&R:  What trends do you see on the horizon that you expect to drive companies’ currency impacts in future quarters?

WK:  One thing in the January report that I think we should really pay attention to is the fact that the Chinese yuan was the third most frequently cited currency on North American companies’ earnings calls [cited by 20 percent of the North American executives who mentioned a currency impact in Q3].

U.S. executives need to be following the changes that China is making to their monetary system and the evolution of their move to a digital fiat currency. When China begins to issue their digital currency, companies that do business there will have to be able to transact in that currency. There will be a transitional period, but it won’t be very long.

T&R:  So, after China introduces their digital currency, that will be the only option available for doing business there?

WK:  Yes, of course it will. They won’t be printing money five years from now.

Before Covid, when I was able to give speeches, I would always ask the audience: ‘Anybody who’s used cash today, please raise your hand.’ And a few hands might go up, but it was usually less than 2 percent of the room. Hardly anybody uses cash anymore. That’s where consumers already are, especially people in their thirties and younger. Corporates and governments have just been slow to follow.

There’s zero question that a move to exclusively digital currency will happen. And it’s going to happen pretty quickly.

T&R:  This will be a huge change for many businesses.

WK:  It will. And as soon as a country releases a digital fiat currency—even during the transitional period—there will be winners and losers among the companies that do business there. The companies that can’t handle digital currency will be the losers. Business will move away from them, shifting instead to the organizations which can handle immediate transactions that are tokenized and very transparent.

One thing people often forget when thinking about digital currency is that it is going to create unbelievable transparency around what companies and individuals are doing. Bitcoin was originally designed to obscure transactions, but the result of digital fiat currencies will be the exact opposite. They’re going to eliminate any gray market, which will be better for the economy.

T&R:  When do you see this transition coming to the U.S.?

WK:  The prior administration in the United States was opposed to even thinking about creating a digital dollar. The new administration is starting to pick it up again, but now the U.S. is way behind. And I am a firm believer in the first-mover advantage when it comes to seismic shifts like this.

If you look at the history of the dominance of currencies—whether it’s Britain, Portugal, Greece, or Rome—there’s always something that led to a shift in which currency was dominant. I know people will read this and think it’s ridiculous to suggest that China could have the new dominant currency. I’m not saying they will, but it’s foolish to assume the U.S. dollar is too big to fail.

T&R:  What should corporate treasury groups be doing now to prepare for this impending ‘seismic shift’ in the currency landscape?

WK:  Corporate treasuries need to be ready, whatever the transition ends up looking like. They can’t speculate on who’s going to have the dominant currency. Their job is to continue to fund their business, to support profitable ventures, and to manage their supply chains properly. That is all going to speed up significantly.

Treasury professionals need to ask themselves:

• Do we have clear, accurate, and immediate visibility into our liquidity?
• If so, how good are we at moving funds?
• How secure are our systems?
• And, in the current low-interest-rate environment, how are we actually optimizing our liquidity?

The shift to digital currencies will impact not just cash, but also payables, receivables, and trade financing. Those are the four pillars that treasury groups will have to be able to execute on much more quickly in the near future.

T&R:  How do you expect the acceleration of workflows across these four pillars to affect corporate treasury teams?

WK:  Well, the key change will be that CFOs are soon going to see the need for a chief liquidity officer for the company. Currently, payments, working capital, liquidity, and trade finance tend to be managed in silos. When the transition to digital currencies is complete, business will be moving too fast to have those functions operating in silos.

Companies will need a chief liquidity officer, whose job it is to break those silos down and create a single, solid picture of the entire company’s liquidity. In some cases, the treasurer might be right for that role, but many treasurers are going to have to make the case to take on that responsibility.

Treasurers who want this role should think about how things work in their companies right now. If the CFO has a concern about liquidity, do a bunch of people gather around the conference table to discuss? If so, that would imply one person isn’t currently responsible for liquidity. The treasurer might have responsibility for cash flows, but other people might handle trade finance, payments, or working capital and receivables.

The number-one thing for treasurers to figure out is whether they are going to take responsibility for presenting the total liquidity of the company, from A to Z, to the CFO. Or are they, instead, going to wait for the CFO to hire somebody else to fill the chief liquidity officer role?

T&R:  And you think the increased pace of business that results from moving to digital currencies will ramp up the pressure on companies to gain this consolidated view of liquidity?

WK:  Yes. I mean, we were already headed there, but Covid accelerated the transition. The digitalization of fiat currencies will finally force companies to make this move. For those that continue to lack this kind of visibility into liquidity, there will be serious negative impacts.