A Costly Year Ahead?

Multinationals are scrambling to avoid losses in a volatile foreign exchange environment. With the Trump administration talking down the dollar, their job is getting more complicated.

A strong dollar, Brexit and trade battles with China combined in 2019 to inflict considerable pain from foreign exchange losses on multinationals around the world. And with US President Donald Trump threatening to turn his trade war into a currency war, 2020 looks like it might be even more costly on the currency front.

US multinationals lost $21 billion in revenue due to foreign exchange swings in the second quarter, according to Kyriba, a treasury management software company that tracks earnings calls. It was the third straight quarter with losses over $20 billion, Kyriba said.

Even the most sophisticated and well-heeled companies are vulnerable to currency swings. Third-quarter earnings at Apple took a $1.1 billion hit to revenues owing to adverse currency moves, for example. “Foreign exchange is clearly a headwind for us right now,” CFO Luca Maestri told analysts on Apple’s October earnings call.

Other major companies suffered too, largely because they operate in dollars and sell to emerging markets, whose currencies have weakened dramatically against the greenback. Abbott Laboratories reported a 4% decline in sales revenue due to currency swings in key emerging markets, including Brazil, Russia and China.

The parade of losses only underscores the fact that managing a safe path through the global foreign exchange market, which the Bank for International Settlements estimates at $6.6 trillion a day, remains more of an art than a science.

“Every corporation is a little bit different,” says Marc Chandler, chief market strategist at Bannockburn Global Forex, a boutique foreign exchange advisory. “You can find two companies in the same space that have two different currency impacts because of their hedging policy. They might hedge 70% of their exposure, for instance. Why don’t they decide to hedge 80% or 90% of it? It all depends on how aggressive they are and what instruments they use.”

Looking Forward

Non-US companies, too, are doing what they can to defend themselves against a treacherous currency market, sometimes successfully.

A Bannockburn client, Piano Software, a business-platform development company based in Slovakia, faced a major currency challenge this summer when it offered to acquire Cxense, a listed Norwegian data management firm that uses a software-as-a-service model.

The purchase price was 351 million Norwegian kroner, about US$39 million at the time of offer, and Piano raised that amount through debt financing from a US bank to close the deal. But then-CFO Alex Franta (now interim CEO) was reluctant to convert the $39 million into kroner; if the deal fell through before completion, Piano might be stuck with the Norwegian currency at a time when it was fluctuating sharply. In one month, the krone had already gained 2.5%, which could have cost Piano an additional $1 million.

Piano’s bank offered to sell it a three-month dollar/krone forward contract. But since the contract required a trade at the end of that period, it raised the same concerns, Franta says.

Instead, Piano took Bannockburn’s recommendation to buy an option on a dollar/krone forward, giving it the choice of exercising the trade but not the obligation to do so. As it turned out, the deal took longer to complete than expected and the option expired without being exercised. The krone by then had depreciated 10% against the dollar, saving Piano nearly $4 million in exchange costs, despite having to pay for the option.

“We’re very glad we went with the option,” Franta says. “Despite the expense, it saved me a huge amount of worry about what the ultimate cost of the deal was going to be.”

Another company facing foreign exchange headwinds is Onduline, a Paris-based manufacturer of roofing materials with turnover of €300 million ($334 million). Onduline has 85% of its sales in currencies other than the euro, including in North America and Asia, says Maxime Firth, the company’s controlling group director.

Onduline had tried to reduce its foreign exchange exposure by opening factories in Turkey and Russia, but extreme volatility in the Turkish lira and Russian ruble hurt the bottom line.

“Many of our expenses in Turkey are linked to the US dollar, so when the lira falls against the dollar, the price of bitumen—the main ingredient we use—rises automatically,” Firth says. The lira lost as much as 5% of its value in a single day in March.

Onduline has tried to compensate by raising prices in Europe, where it keeps its books priced in euros, Firth says. To avoid currency shocks while covering dividend payments to its Russian subsidiary, its biggest wholly owned business, Onduline purchases euro/ruble forwards.

The company has also began using a cloud-based planning platform called Anaplan to make sure the home office has the latest data from its manufacturing plants and can budget for any currency swings. “We can simulate various currency scenarios to make budgeting easier and more accurate,” Firth says.

The Trump Effect

Businesses on the other side of the Atlantic face a different kind of uncertainty. For the moment, US-based companies have an advantage in hedging due to the strong dollar. The cost of a forward contract is based on the spot exchange rate multiplied by the difference in the interest rates between the two currencies. With the dollar deposits offering higher interest than most of the rest of the world’s major currencies—the euro interest rate is actually negative—US companies, in effect, get paid to hedge.

But that may change if Trump is successful in his efforts to talk the dollar down, “so that countries … no longer take advantage of our strong dollar by further devaluing their currencies,” he proclaimed on Twitter on December 2.

Trump called on the Federal Reserve to lower interest rates to reduce demand for the currency and lower its value in foreign exchange transactions. Should the Fed decline to act, “this makes it very hard for our manufacturers and farmers to fairly export their goods,” the US president tweeted.

Trump—who has used tariffs as a weapon in trade talks with China, the EU and Canada—appears to have decided to turn trade conflicts into currency conflicts, and this could have far-reaching implications for multinationals.

“Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers,” Trump tweeted. “Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S. from those countries.”

Commerce Secretary Wilbur Ross followed up on Trump’s comments by hinting to Fox Business that other countries could also be punished for alleged currency manipulation: Brazil and Argentina “are not the only [countries] where there are currency issues,” he said.