Worst yet to come for US corporate profits stung by currencies

NEW YORK (Bloomberg) - The drag on corporate profits from fluctuations in foreign-exchange rates is getting worse as the second quarter comes to a close.

Currency-market volatility that's almost doubled in the past 12 months poses the biggest threat to earnings of any year on record, according to FiREapps, a company that advises businesses and makes software to help reduce the impact of currency swings. That would surpass the approximate US$47 billion in losses for North American companies that reported in 2012.

Companies from Facebook Inc. to Microsoft Corp. have already warned that their bottom lines will take a bigger hit than in the first three months of the year. While the US dollar's surge is the main culprit, swings in everything from the euro to emerging-market currencies are magnifying the pain and making it more expensive to hedge.

"A key message that we have for our corporate clients is that volatility is back," said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank in Toronto. "If companies thought it had been bad in 2014, 2015 is not going to be any easier."

The dollar has been rising in anticipation of the Federal Reserve's first interest-rate increase since 2006, reducing the value of earnings abroad when converted back into the greenback. The rally has also made American companies' goods less competitive overseas.

Bloomberg's Dollar Spot Index reached a record on March 13, capping a 22 per cent rise that began in July. The gauge - which tracks the greenback against 10 major peers including the euro, yen and British pound - has fallen 3.6 per cent since.

It's forecast to strengthen versus all but four of its 31 major peers by Dec. 31, according to strategist estimates compiled by Bloomberg. At the end of last year, the dollar was predicted to drop against 13.

The average North American company lost 8 cents per share due to currency fluctuations during the first three months of the years, almost double the average in 2014, according to FiREapps, which monitored 850 companies' earnings conference calls. North American and European companies lost a combined US$31.68 billion, 55 per cent more than during the fourth quarter.

Wal-Mart Stores Inc., the world's largest retailer which gets more than a quarter of its revenue from international markets, missed analysts' first-quarter earnings estimates in part due to swing in exchange rates. Chief Financial Officer Charles Holley warned on a May 19 conference call that investors should be prepared for similar detractions from earnings due to currency movement the rest of the year.

A JPMorgan Chase & Co global index of implied volatility in currency options has risen to about twice the record low 5.28 per cent touched in July. Higher implied volatility, a component used in pricing options to buy and sell currencies, also means corporations' hedging costs have risen at the same time that their need for insurance against foreign-exchange changes has grown.

Facebook lost 7 percentage points of revenue growth due to the stronger dollar last quarter and expects a bigger hit in the current period, Chief Operating Officer Sheryl Sandberg said during an April 23 conference call.

Microsoft Chief Financial Officer Amy Hood said the same month that the "significant impact" of the strengthening of the dollar on the company's quarter-end March 31 results will worsen in the April to June period.

"2015 will likely be the worst year we've ever seen with regard to negative earnings impacts on companies," said Wolfgang Koester, chief executive at FiREapps. "There is volatility in so many different currencies as major central banks are no longer taking concerted efforts to manage markets. That is causing havoc."