Managing Currency Impacts in 2024

Every quarter, Kyriba analyzes the effects that currency movements have had on the financials of large multinationals based in North America and Europe. It determines those effects by reviewing transcripts of the companies’ earnings calls. Kyriba’s latest study, “February 2024 Currency Impact Report,” covers 1,700 publicly traded organizations’ earnings calls from the third quarter of 2023.

According to this research, 22.8 percent of the multinationals quantified currency impacts to their Q3 financials, including US$13.92 billion of tailwinds (positive impacts) and $16.01 billion in headwinds (negative impact). It’s worth noting that this represents a 20.5 percent decrease in the total negative currency impact reported, compared with Q2/2023. The euro was the currency most frequently mentioned as impactful in the third quarter.

To better understand what this means for corporate treasury teams, Treasury & Risk talked to Andy Gage, senior vice president of foreign exchange (FX) solutions and advisory services at Kyriba.

Treasury & Risk:  What do you see as the key takeaways of the latest Currency Impact Report?

Andy Gage:  In the context of this snapshot of corporate concerns during the Q3 reporting period, two interesting themes arise. One is the continuing shift of the headwinds we’ve seen over the past several years in the United States. Suddenly, headwinds are becoming more prominent in Europe as the dollar comes off its record highs from 2022 into 2023.

And the second theme I see is an echo effect of that: The currencies in Europe are starting to become more problematic as the dollar comes off its highs over there. We are clearly not out of the woods in North America. The dollar is still moving in some interesting ways; it rebounded a bit unexpectedly during the third quarter. But the impacts are more muted than they were when the dollar was at its all-time high.

I think 2024 is going to be interesting because we really don’t have clear direction on which way the dollar is going to go next. The continued strength of the U.S. economy and the fact that the Fed is being less assertive than expected with lowering rates have everyone in a pause, waiting to see how things play out. So, I am advising clients to manage toward uncertainty.

T&R:  What does that managing toward uncertainty look like? What should treasury teams in multinational businesses be doing right now to prepare for whatever may come?

AG:  They really need to broaden their vigilance beyond their major exposures. Many corporates have a few currency pairs that represent very large exposures. As you would expect, those are dependent on where the company does the most business, on either the supply side or the revenue side. In most cases, if you’re located in North America, those are going to be common trading currencies like the euro, pound sterling, and yen.

But what I’m hearing is that companies are increasingly worried about currencies that may not be as prominent for them from a trading standpoint but that could still come in and really blindside them. Managing toward uncertainty means keeping an eye on everything that’s moving, because you don’t know when a lesser currency—which may not be as large in terms of notional value—is going to come in and trip you up.

Some companies are pushing for automation in their FX risk management for that reason. They may not want to hedge all their risk, but they want access to all the data so that they can keep an eye on their risks and step in if they need to reduce their exposure to a particular currency.

T&R:  It seems like understanding the company’s exposures is always critical for a treasury team, but you’re saying the current level of uncertainty makes it especially important right now.

AG:  Yes. The Argentine peso and Turkish lira are good examples. The operations a company has in Argentina or Turkey may pale in comparison with other parts of the world, but the company still needs to be ready to respond to a sharp movement in the peso or lira. Unless the treasury team is on top of the risks, it will not be equipped to deal with that.

I have seen that story repeated many times over the past decade. The key message is that treasury groups can’t become complacent and focus only on their major trading currencies. They need to keep an eye on everything that’s out there that could possibly impact their business.

T&R:  The Currency Impact Report indicates that 22.8 percent of companies quantified the impacts of currencies on their financials in Q3/2023. Is that higher than in previous periods?

AG:  Well, you have to keep in mind that some of those companies reported headwinds and some reported tailwinds. So, are more companies seeing impacts? Yes. But are they all negative? Not necessarily—although in the eyes of a risk management purist, unexpected gains are just as bad as losses in terms of making sure a company has the proper controls in place to manage the risk.

I’ve worked with organizations before that were experiencing outsized gains in terms of FX risk. That was great for the financials, but it was making the treasurer and CFO very nervous because they knew how quickly the trend could flip from gains to losses. Either way, a currency impact is a clear indication that the treasury group needs to get better at budgeting for FX gains or losses.

T&R:  In the Kyriba study, 264 North American companies reported currency impacts, out of the 850 Kyriba studied. Might this number indicate an increase in openness about these types of financial impacts?

AG:  Companies are definitely pushing more disclosure around the overall FX impact on their financials, whether it’s plus or minus. They want investors to really understand the organic performance of the business, stripping the currencies out. Even if they benefited significantly from currency impacts, treasury and finance teams need for all their stakeholders to understand that they can’t bank on the same positive impacts in future quarters as well.