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Brexit “will double” FX volatility impact – FIREapps report

The FiREapps Quarterly Currency Impact Report for Q1 has found that exposure to foreign exchange (FX) volatility has cost companies $20 billion in the first quarter of this year. It predicts that the impact of the UK's 'Brexit' referendum “should double that”.

This is the fifth time in six quarters that companies have sustained more than $20 billion in currency headwinds, says FIREapps.

Brexit: a domino that could kick off many others

FiREapps CEO Wolfgang Koester said: “We typically don’t look ahead in our currency impact report, but in light of Brexit – a domino that could kick off many others – we posit that in the second quarter (perhaps) and in the third quarter (certainly), Brexit will create significant impacts on the income statements of companies who did not prepare (despite more than 40 per cent odds of a leave vote) for Brexit. Because Brexit happened so late in Q2, it will be interesting to track whether the impacts show up in Q2 earnings, or more likely, Q3. Either way, it would not surprise us to see record setting reports of negative impacts totalling as much as $35-40 billion as a result of this latest crisis.”

FX volatility is the new norm

Other findings from the report include:

  • 400 companies (out of 1,200 surveyed) reported negative currency impacts in Q1 2016. The majority of these (338) were North American, compared to 62 European companies.
  • The size of the negative currency impact was quantified at $20.3 billion for Q1 2016. The majority of this was reported by North American companies.
  • Greater FX instability is the new norm. Brexit is the latest in a series of currency fluctuations. FIREapps predicts that the renminbi could provide further volatility this year: “The Chinese yuan will likely offer a currency crisis this year as well. The weak Chinese economy cannot afford currency appreciation, so China will have to further decouple the yuan from the U.S. dollar, lest a rising dollar take the yuan with it.”
  • Instability in Venezuela, Argentina and Brazil could also give rise to currency volatility in Latin American in 2016.
  • The average EPS impact was negative $0.06— 6x more than the $0.01 management objective leading multinationals have for their FX managers.
  • The euro was reported as the most impactful currency, with more than double the mentions of the next closest currency, the Canadian dollar.

This item appears in the following sections:
FX Management & Crypto
Buying & Selling FX
FX Settlement
Risk Management
FX Hedging & Risk Management

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By Paul Stheeman on 21st Jul 2016:

Don’t forget, for every corporate facing headwinds there will be another one enjoying the tailwinds! A prudent Treasurer will have policies inplace ensuring that the company is hedged in the short-term.

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