The US dollar has been on a historic rally against many of the world’s currencies.
“The USD ended the first quarter up 16% year-on-year against a trade-weighted basket of major currencies, the highest quarter-end increase since September 1981,” Barclays’ Jonathan Glionna wrote in a research note to clients.
Unfortunately, a strong dollar is problematic for US-based multinational companies as the value of their overseas earnings deteriorates from the US perspective. The strong dollar also makes US exports more expensive and therefore less competitive in the international marketplace.
According to FactSet, the strong dollar is by far the number one complaint among companies announcing their first quarter financial results. In its earnings announcement Wednesday afternoon, Netflix said the currency swing cut $US48 million from its intentional business revenues. Netflix earned just $US0.38 per share during the first quarter, but excluding these losses, it would have earned $US0.77.
But a strong dollar is not all bad. It makes imported goods cheaper. For many US-based manufacturers who import their raw materials, this is great news.
According to Glionna’s estimation, the strong dollar has been more negative than positive for S&P 500 revenues.
“Taken together with the percentage of international sales, which has grown to 30% over the last decade, we estimate the translation headwind from USD appreciation will reduce 1Q15 S&P 500 revenues by 5%,” he said.
Below is a chart of the net effect of currency swings on revenue (dark blue line) over the past 20 years. This was during a period when the dollar was falling and companies were increasing their oversees exposures (light blue line).
As for earnings in the near-term, here’s Deutsche Bank’s David Bianco: “About 1/3 of S&P revenue and 40% of its profits are earned abroad. However, a substantial amount of Tech and Energy sector foreign earnings are denominated in dollars. We estimate that roughly 25% of total S&P profits are earned in foreign currencies. Thus, every 10% appreciation in the dollar vs. major currencies hits S&P EPS by 2.5% or $US3.”