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Intuition Insights – Financial Services

The Rising Greenback

Transaction Banking

Collateral Management

Managed Futures

Rising Greenback Is No Picnic for US

The first six weeks of 2015 saw 411 companies in the S&P 500, the US benchmark index, report earnings for Q4 2014. Of this number, 299 companies beat consensus EPS estimates and 108 missed.

Many of the companies who missed – as well as many of those who beat – the estimates attributed some part of their negative results to the “strong dollar” and “currency headwinds.” Ominously, a large number of US corporations have lowered guidance for 2015 earnings due to the same two factors.
Since the end of June last year, the US dollar is up 17% against the euro, 15% against the yen, and 10% against sterling. The greenback’s performance against emerging market currencies has also been stronger – it is up 0.8% against the Chinese renminbi, 3.5% against the Indian rupee, 23% against the Brazilian real, and 45% against the Russian ruble.

US firms typically do not hedge FX exposures in their ex-USD revenues, so they suffer whenever the dollar is strong. Very few companies worldwide hedge their currency exposure to translation of their assets held in non-home currencies back to home currencies. Both of these factors have hit US corporations’ earnings.
The strong US dollar also impacts US exports, making them more expensive. According to the US Census Bureau, the US international trade deficit increased to USD 505.0 billion in 2014 from USD 476.4 billion in 2013, with US exports down to USD 2,345.4 billion in 2014 from USD 2,850.5 billion in 2013. Most of these numbers represent manufactured goods moving both into and out of the US. The three largest countries exporting to the US are China, Germany, and Japan, while the three largest buyers of US goods and services are Hong Kong, The Netherlands, and the UAE.

Intuition Know-How can help you develop a deeper understanding of reported earnings, stock market reaction to lowered guidance, how corporations use foreign exchange, and national accounts including the balance of payments.

Relevant tutorials include: 

  • Corporate Finance – Measuring Business Performance – Free Cash Flow
  • Corporate Finance – Measuring Business Performance – Economic Profit
  • The Foreign Exchange Business
  • Foreign Exchange – Factors Influencing Exchange Rates
  • Trade Finance – An Introduction
  • Macroeconomics – Gross Domestic Product (GDP)
  • Macroeconomics – Balance of Payments
  • Economic Indicators – National Accounts

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