A 12% rally in the euro this year is pushing it towards levels that market watchers predict will be painful for profits in the region, particularly for exporters who have to both translate their overseas sales back from less valuable currencies, and face competition from cheaper products abroad.
The concern has dragged the Euro Stoxx 50 Index down almost 4% since a May peak.
Every 10% move in the euro wipes out as much as 8% of earnings if not hedged, Morgan Stanley strategist Matthew Garman wrote this month.
Europe’s global firms typically use financial instruments to manage currency risk: this was evident in 2015, when they failed to reap the full windfall from a slumping euro. The level, timing and duration of protection can vary significantly. Even fully hedging for near-term volatility will “ultimately only delay the impact from FX moves” for a company, Garman said.
Euro-area firms get 48% of their revenue and 54% of their costs from domestic markets, according to Morgan Stanley. Below is a selection of comments taken from the latest round of earnings calls.
Infineon Technologies chief financial officer (CFO) Dominik Asam told analysts on August 1 that every $0.01 change in the euro-dollar exchange rate moves the German chipmaker’s revenue by about 9 million each quarter. On whether the company can still be more profitable next year, he said there will be more clarity in November.
Kering: It’s still too soon to raise prices outside Europe, the Gucci brand owner’s CFO Jean-Marc Duplaix said on July 27. At the same time, he acknowledged there could be an effect on pricing, tourism flows and profitability, as well as translating revenue back into euros and absorbing costs in the shared currency.
Adidas: The sportswear maker, which gets cost benefits from a weak dollar, has already hedged its currency risk up to the next 18 months, CFO Harm Ohlmeyer said on August 3. In terms of effects on profitability, the second half of 2017 will be better than the first, and the company may get some benefits next year, he said.
Société BIC: The pen maker has hedges in place at $1.11 per euro for this year, while more than half of 2018 is also protected at a similar level, according to CFO Jim DiPietro. Any impact from the rising euro will be partially offset by stronger currencies in Latin America, assuming it stays around the same level, he said on August 3.
Michelin & Cie: CFO Marc Henry said on July 25 that the tyre maker is assuming an average rate of $1.15 per euro in the second half of the year.
Daimler: The carmaker hedges its currency risk so far out that it’s already covered for most of 2018, CFO Bodo Uebber said on July 26.
Volkswagen AG: Foreign exchange effect will probably have a net positive impact of about 500 million in 2017, CFO Frank Witter said on July 27.
Siemens: While the company is typically hedged for the next three to six months, CFO Ralf Thomas agreed with an analyst on August 3 that a strong euro would probably trim the company’s profit margin by between 50basis points and 100 basis points in 2018.
Bayer: The German firm said a 1 percentage point move in the euro versus a basket of major currencies equates to about 300m in sales a year and 80m in earnings.
The company on July 27 trimmed its profit and sales estimates for 2017, blaming the currency and a stumble in agriculture.
Covestro: The plastic maker has based its 2017 forecasts on an average exchange rate of $1.10 per euro - weaker than where the currency is now.
Chief executive Patrick Thomas told Bloomberg TV that it was the first time “in a decade or more” that he’d even talked about foreign exchange.
Merck: The company will face headwinds in the second half of the year, given the adverse currency effect and challenges at its performance materials unit, according to CFO Marcus Kuhnert. Achieving financial targets in the period “will not be a walk in the park,” he told analysts on August 3.