According to FiREapps, its bad news for multinational companies since Brexit is still sending shock waves through the $5.3-trillion-a-day currency market.
FiREapps said that as businesses gauge the impact of the U.K.’s vote to leave the European Union, earnings in North America will probably be cut by a record $35 billion to $40 billion in the second or third quarter. FiREapps makes software to help firms reduce the effect of foreign-exchange swings.
A period in which companies had a brief respite from currency volatility has seemingly ended but the Brexit-related headaches are back. FiREapps data shows that down from $36.9 billion in the fourth quarter of 2015, company results were down by about $20 billion in the first quarter in North America and Europe due to foreign-exchange moves that hurt company results.
“Everybody really wanted to know this time around, ‘what is it actually going to mean? At $35 billion, that would make it the worst quarter impact” in data going back five years’” said Wolfgang Koester, chief executive officer of FiREapps in Scottsdale, Arizona.
During times of market turbulence investors seek downward fluctuations and rallies in currencies as happened soon after the U.K. vote which sent the pound plunging to a 31-year low last month and fueled a rally in the yen. According to FiREapps, earnings for 357 North American firms in the fourth quarter have been dragged down by Dollar fluctuations and currency volatility which have posed a “nightmare” for companies. That was the most companies under duress since at least 2011.
For companies that are seeking to sell their products in foreign countries, their competitive pricing can be undermined by such currency swings. Apart from hedging their exposures, for companies that operate in weaker overseas currencies can be hit when they account for revenue denominated in such weaker currencies.
Amid uncertainty about the U.K.’s future relationship with the EU and other trading partners, many U.K. businesses have put investment plans on hold. Whether they will retain access to low-cost labor from other EU countries as well as the EU common market is the main areas of concerns for some companies. Whether tariffs or onerous conditions would be faced to sell their goods in export markets is another issue that some other firms aren’t sure about.
One example can be found when visitors flocked to its domestic stores to take advantage of the weak pound which led to Bottom of Form
the Burberry Group Plc reporting an increase in U.K. sales in the final weeks of June. Due to uncertainty about Brexit¸ the company was pausing plans for a plant investment in Leeds, England, said Chairman John Peace. Burberry said the project will go ahead, but its timetable may be affected.
While some weren’t able to quantify the extent of their foreign-exchange risk even a week after the poll concluded, many companies hadn’t sufficiently hedged their currency exposure in the run-up to the U.K. vote, Koester said.
“You’re seeing people getting caught by surprise, thinking that these volatile times would soon be over — and they’re kidding themselves,” Koester said.
(Adapted from Bloomberg)