Exceptional, currency specialists call it. Cryptocurrencies, yes, they are known for large price fluctuations. But right now, the volatility of the ‘regular’ currency is higher than that of the cryptos.
Mainly responsible for the turmoil in the foreign exchange market is the strong dollar, under the influence of interest rate increases. The Fed is raising interest rates relatively strongly and quickly, while the ECB has to carry out a balancing act to keep all euro countries happy. The ECB is therefore more cautious. Interest rate hikes have a positive effect on the currency’s exchange rate, and the dollar has appreciated rapidly against the euro in recent times.
What effect does the volatility of the foreign exchange market have on the Dutch operating results? As long as you as a company make costs and turnover in euros, there is little to worry about. But many raw materials are settled in dollars as standard and companies also import many materials from countries that prefer to be paid in dollars. As in other cases of extra costs, companies also have two choices in the event of currency fluctuations: pass it on to customers, or collect it themselves and thereby ‘eat’ their own profit margin. Small businesses are at a disadvantage here, often unable to choose option one because they quickly price themselves out of the market. The situation is different for multinationals.
“Analysts’ profit expectations for Dutch listed companies for this year have fallen by an average of 5 percent compared to their expectations at the start of the third quarter,” said Thomas De Caluwé, currency specialist at Argentex, a British currency services provider that recently opened a business in the Netherlands. has a permit. De Caluwé immediately adds that the ‘outlier Shell’ (huge profit) has not been included in the calculation.
And of course, the lowered earnings forecast does not apply to all companies. “The winners of this situation are the companies with a large market in the US and therefore a large dollarcash flow”, says De Caluwé. He cites Ahold-Delhaize and Heineken as examples. And you are in the right place as a company if you incur most production costs in East Asian countries. At least, if you can pay in the local currency; the Chinese yuan and the Japanese yen are low against the euro, so that is again favorable.
Incidentally, it is not the case that companies are completely at the mercy of the vagaries of the foreign exchange market. There are ways to reduce currency risks, says De Caluwé. For example, companies enter into forward contracts in which they fix an exchange rate for a payment they make later. That works just like futures.
“There are companies that have protected themselves against price fluctuations at the beginning of the year. They now trade at times as much as 10 cents above the current dollar price,” says De Caluwé. “But those contracts start to expire and then companies have no choice but to trade at the current price.” In that respect it is comparable to your energy contract. When that expires now, you will be confronted with the current market prices.
The extreme volatility of the foreign exchange market also contributes to another trend. Due to shortages and logistical problems during the pandemic, companies in Europe again tended to produce locally. The currency markets reinforce this. “I already see SMEs that more often get their goods from European countries, so that they can simply pay in euros,” says De Caluwé. “A country like Turkey, where a lot is paid in euros, is also starting to become popular.” It may be slightly more expensive, he says, but that excludes a currency risk. And that means in this period: much more certainty about the profit margin that ultimately remains.
A version of this article also appeared in the newspaper of October 17, 2022