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Currency Headwinds Continue to Impact US Earnings

Currency Headwinds Continue to Impact US Earnings

2016-04-21 05:27:00
Daniel Dubrovsky, Analyst
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Talking Points

  • US Dollar appreciation can have adverse impact on global business trends
  • Companies such as Delta, Wells Fargo, and PepsiCo report FX headwinds
  • 1Q US earnings flow continues. Ford, Amazon, and Chevron on the docket

Having trouble trading in the FX markets? This may be why.

The first quarter US earnings season began with Alcoa reporting soft revenue growth. In addition, the company noted that there were negative impacts such as foreign exchange offsetting revenues. This may be in part due to a stronger US Dollar making goods and services more expensive for those wishing to purchase these products outside of the country. Even though the Fed has lowered its forecast for rate hikes this year to 2 from 4, this still could cause the USD to appreciate if US economic news flow outperforms.

As a result, many businesses have been citing FX headwinds over the past two weeks. For starters, Fastenal noted that the impact of currency fluctuations was -1.0 percent on sales growth in 2015 versus -0.8 percent thus far in 2016. Delta Airlines operating revenue for the March quarter decreased 1.5 percent citing foreign currency pressures and passenger unit revenues declining as a result of FX. Wells Fargo, a large US bank, reported foreign currency translation adjustments netting -$55 million losses.

Here are additional comments on this theme from other notable firms:

PepsiCo:

  • (Regarding Latin America) Offset operating cost driven by strong US Dollar.
  • (Regarding Europe Sub-Saharan Africa) Negatively impacted by higher raw material costs, primarily driven by strong US Dollar.

Omnicorp Group:

  • A decrease in revenue from the negative impact of foreign exchange rates of 2.8% when compared to 2015.

CSX:

  • Continued low commodity prices, strong USDollar and energy market transition will challenge second quarter and full-year 2016 performance.

Northern Trust Corp:

  • Investment and other servicing fees, partially offset by lower foreign exchange trading income.
  • Foreign exchange trading income in the current quarter increased $8.0 million, or 15%, to $60.5 million compared to $52.5 million in the prior quarter, driven by higher currency volatility and client volumes.

Navient:

  • Percentage net gains on derivative and hedging activities decreased $70 million. The primary factors affecting the change were interest rate and foreign currency fluctuations.
  • Other income decreased $20 million primarily due to a reduction in foreign currency translation gains. The foreign currency translation gains relate to a portion of our foreign currency denominated debt that does not receive hedge accounting treatment.

Over the next three weeks, more major US companies will release their earnings reports. It will be important to note if any of them mention foreign exchange headwinds and to what extent. This could influence FX market price action by shaping economic growth and policy expectations as well as broad-based risk sentiment trends.

Here is a list of major upcoming earnings releases over the next few weeks:

Currency Headwinds Continue to Impact US Earnings

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