As financial market participants wait for the U.S. Federal Reserve to raise interest rates, emerging markets have seen some of the most substantial currency volatility—predominantly depreciation against the U.S. dollar—in recorded history. As a result, North American and European companies are experiencing substantial losses to currency translation. Local currency earnings are making up lower dollar earnings, even where volumes are improving, and disrupting multinational targets.

In the second quarter of 2015, companies experienced one of the top five largest translation losses to date.

A total of 211 North American and European companies reported negative currency impacts, amounting to $19.49 billion in losses. This is nearly five times the negative currency impact seen in the second quarter of 2014. While the incidence and total size of impact is down from the first quarter of this year (Q1 2015), in which $31.68 billion in currency-related losses were reported, the magnitude of impact on the companies that did quantify currency translation losses has increased. The average negative impact per company has reached $177 million in North America and $110 million in Europe.

(Click to view larger) Source: Frontier Strategy Group & FiREaPPS

Executives are seeing more significant sustained currency translation risk than during the height of the euro crisis. FSG anticipates that currency volatility will not only remain at high levels, but also that managing that risk will continue to become increasingly complex.

• Currency volatility will remain: Central bank intervention, particularly in the U.S. Federal Reserve, creates uncertainty and exacerbates volatility. FSG anticipates that the Fed’s interest rates decisions will continue to have important and uniform global impacts until the size and pace of interest rate hikes in the medium term (one to three years) is clearer.
• Managing currency volatility will continue to become increasingly complex: While most global currencies have depreciated against the U.S. dollar throughout 2015, sourcing and selling outside of the U.S. leads to a much more complex picture. The euro, for example, has depreciated 23.5 percent YOY against the US dollar, but it has also appreciated against some currencies important to the region’s supply chain.

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Implications for action

Given sustained and increasingly complex currency translation risk, FSG recommends that executives consider the following actions:

• Re-examine your product positioning: Rapidly changing exchange rates makes imported products more expensive. FSG’s clients are experiencing changes in customer preferences toward cheaper, localized products. As a result, your competitive position and market share can change without any change to your product price or packaging. Re-examine your customer segmentation and product positioning to understand where you may have pricing power, or where marketing campaigns may be value-additive in maintaining or even gaining market share.
• Extend payment terms: In previous years, currency volatility has caused executives to tighten payment terms, ensuring that they receive as much revenue as they can. However, slowing global economic growth and depreciating local currencies means that many partners and customers are struggling to make ends meet. Now is the time to work with your local team and consider extending payment terms.
• Go local: Particularly for companies reporting in U.S. dollars, local assets have become cheaper. Where joint venture, merger or acquisition is an effective corporate strategy, it is time to localize production.

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