Lost In Translation

As volatile currencies toy with the bottom lines of global companies, corporate treasurers are paying a lot more attention to foreign exchange.

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When translated back into the currency of a company’s home country, overseas earnings are, in many cases, taking a big hit. At the height of the euro crisis in 2012, North America–based multinationals were losing more than $20 billion quarterly from negative currency moves. Three years later, corporations are reporting even more significant, sustained, negative currency effects on earnings, in both developed and emerging markets.

In the first quarter of 2015, quantified negative-currency impacts hit a record $29 billion for companies in North America, according to FiREapps, which helps companies measure and manage their foreign exchange exposure. While the second-quarter total negative impact declined to $17 billion, some individual companies were hit very hard, pushing the average impact per company to $177 million, the highest since FiREapps began measuring these effects in 2012.

North American companies aren’t the only ones affected. European corporations are facing currency surprises in all markets, with no single region an obvious culprit. For this reason, an increasing number of multinational corporations are managing currency risk across the complete portfolio of currency pairs they are exposed to, FiREapps says.

The $5 trillion-a-day FX market does offer hedging mechanisms to manage currency exposures. For the first time, in this supplement, Global Finance is featuring a list of FX market participants that are innovators in their businesses. These innovators are introducing new products and services and groundbreaking solutions for corporate clients.

The reality is that the market will never be the same again. The FX market is scrambling to restore its credibility following a series of damaging scandals. Computers are increasingly replacing human traders, and exchanges are maneuvering to take significant shares of what used to be an exclusively over-the-counter market.

Market participants are trying their best to adjust to a more open and fast-moving ecosystem, but there is not likely to be any reprieve from currency volatility. When the going gets tough, market makers, who could in the past have been depended upon to smooth things over, may be fewer and farther between. Many of the big FX banks are cutting back or simply acting as intermediaries, funneling orders to electronic systems.

When the People’s Bank of China surprised the market with a 1.9% devaluation of the renminbi in August, that currency’s value plunged against the dollar. Chinese officials have warned of more volatility to come. Treasurers at multinational companies doing business in or with China should be prepared for more bumps along the way while preparing for another free-floating currency.