The G7 countries also addressed the issue (sort of) at an informal gathering last weekend. The Financial Times reported: “Participants reaffirmed their commitment not to use economic policy to seek weaker currencies and did not conclude Japan was breaking that pact yet.” With respect to currency movement specifically, the only thing the G7 has agreed to in the past few years is that currency movement should not be too erratic. So it would seem that the G7’s position is that a 10% quarterly movement (in this case, yen devaluation) is not too erratic.

From my perspective, it doesn’t really matter whether competitive devaluation is the driver or a by-product of monetary policies: for global corporates, the effect is the same. Take a U.S.-based multinational corporation; the effects of global competitive devaluation include:

1)    Loss of global competitiveness – Assume that a U.S. company competes with companies in Japan. When the Japanese yen depreciates relative to the dollar, then the Japanese companies’ products are less expensive in global markets than the U.S. company’s products – and the U.S. company’s products are thus less competitive.

2)    Revenue losses – Assume that the U.S. company sells into Sweden and conducts those transactions in Swedish krona. The company signed a contract one month ago to sell 10 widgets for 10 Swedish krona, which at the time was equivalent to 1.6 U.S. dollars. Because the krona has depreciated, 10 krona are now equivalent to just 1.5 U.S. dollars. So the company has a 6% FX loss on that transaction.

3)    Increased difficulty planning – Global competitive devaluation, currency wars, of the kind going on right now creates a lot of volatility in the currency markets. Combined with the fact that corporations are doing business in more places than ever, increased volatility makes trying to stay ahead of currency fluctuations essentially a game of whack-a-mole.

There are ways that companies can manage these impacts. When a company has accurate, timely, and complete insight into its currency exposures, then it can manage those exposures, so that at the end of the day the company isn’t impacted at all by global currency wars.

Related publications:

Ÿ  FiREapps Battlefield Report: Why Do Countries Engage in Currency Warfare?

Ÿ  Global Currency Wars Are Here to Stay

Ÿ  U.S. Firms Brace for Currency Wallop

Ÿ  U.S. Corporate Earnings Whipsawed by Yen’s Drop

Currency war battles in the Asia-Pacific

Many of the most recent currency war battles have been precipitated by Japan’s continuing aggressive monetary easing and fiscal expansion, which has pushed the yen down more than 20 percent against the dollar in the last six months. In particular:

• New Zealand – The Reserve Bank Governor said the central bank sold the kiwi and would do so again to protect growth, prompting the New Zealand dollar to fall to a five-week low.
• Australia – The Reserve Bank lowered its benchmark interest rate, prompting the Australian dollar to match its weakest level in two months.
• ŸSouth Korea – The central bank lowered its benchmark rate from 2.75% to 2.5%, the first cut in seven months.

Countries in the Asia-Pacific are particularly susceptible to a weaker yen because of their close economic ties with Japan. Many of South Korea’s exporters, for example, compete directly with Japanese exporters. Given these relationships, devaluation of the yen can have significant negative impacts on the economies of these other countries, sparking the kind of competitive devaluation we’re seeing.

Currency war battles in Europe

Similarly, countries affected by the continuing weakness of the euro also took action to protect their economies from relatively strong currencies (which make their exports less competitive):

• ŸSweden – For years the central bank staved off calls to stem the ascent of the krona, which has risen 28 percent against the euro. Last week the Swedish finance minister said he would intervene if the krona continued to strengthen.
• Norway – Reserve Governor Oeystein Olsen has warned he’s ready to cut rates should krone strength persist.
• Switzerland – Switzerland already caps its franc against the euro at 1.20.

The casualties

From these most recent battles, I see three significant trends that could intensify the negative impact on U.S.-based multinationals:

1)    This is a continuation of the trend that has currencies on the fringe delivering significant surprises to global corporations. The problem is that most MNCs are in so many countries around the world (many of them emerging markets) that trying to predict these impacts – against the reporting currency and between each other (cross currencies) is like a bad game of whack-a-mole.

2)    Currency wars are becoming more belligerent. Countries that just two months ago said they would not engage in currency devaluation are now doing it out of domestic economic and political necessity.

3)    Investors, analysts, boards, and senior management at a minimum want to ensure that results will not be worse than they have been historically. Yet given surprises from fringe currencies and increasingly belligerent battles, results will worsen if the company does not improve the process that created those results historically.

How are you impacted by global currency wars? Join the conversation by commenting below.

Related FiREapps publications:

• Ÿ FiREapps Battlefield Report: 3 Things You Need to Know About the Currency War
• Ÿ FiREapps Battlefield Report: Why Do Countries Engage in Currency Warfare?
• Ÿ Another Shot in the Currency War: Venezuela Announces 32% Devaluation
• Ÿ It’s Yen Week, with Competitive Devaluation and Currency Wars Headlining

The challenges

• Ÿ  International expansion – In just a few years, international business as a percentage of Hubbell’s consolidated business volume grew from single digits to 20 percent
• Ÿ  Global exposures – Hubbell’s largest exposures were in some of the world’s most volatile trading currencies, including the currencies of Australia, Brazil, Canada, China, the eurozone (primarily through commercial exposure to Italy), Mexico, Switzerland, and the UK
• Ÿ  Technical complexities – Exchanging critical financial information with a single instance of SAP and other legacy accounting systems

As a result of the international expansion and increased global currency exposure, and the technical complexities that made managing those exposures very difficult, Hubbell’s consolidated corporate profit and loss (P&L) statement reported, on average, $2 million of FX volatility.

The solution

After determining that an outside solution would be necessary, and then undergoing a rigorous selection process, Hubbell selected FiREapps FX OnRamp, designed specifically for treasury organizations seeking to establish an institutionalized FX risk management program for the first time.

FX OnRamp “combines a pragmatic and proven three-step methodology with cloud-based applications that enable treasury and finance teams to easily harmonize and validate disparate GL data from their underlying systems of record so they can effectively analyze their complete portfolio of exposures on demand,” writes Wardlow.

In addition, “as a Software-as-a-Service (SaaS) application, FiREapps does not require traditional software implementation and integration projects; instead they provide enrolment services to help their clients get up and running quickly without the need for hardware or IT development.”

The results

• Ÿ  Identification of FX exposures on demand, eliminating many sources of delay and human error from the data gathering process
• Ÿ  Institutionalized data integrity processes and, as a result, increased user confidence in making FX exposure management decisions
• Ÿ  Significantly enhanced FX risk management and overall financial operational excellence
• Ÿ  Establishment of a benchmark for FX risk, based on FiREapps’ proprietary Value at Risk (VaR) tools
• Ÿ  Identification of new ways to reduce or eliminate exposure and risk organically
• Ÿ  Identification and implementation of the optimum hedging strategies that comply with commercial requirements and with treasury risk management policy, with the help of FiREapps’ patented CoRE analytics

Wardlow closed the gtnews article with this: “I would recommend that corporations who are wrestling with the complexities of FX exposure management consider what we have managed to achieve at Hubbell, and see if such an approach would add value to their treasury and finance operations.”

Learn more

• Ÿ  gtnews article – Case Study: The Management of Hubbell Incorporated’s Global FX Exposure
• Ÿ  FiREapps case study – Featured Case Study: Hubbell, Inc.
• Ÿ  FiREapps video – Howard Wardlow Hubbell Establishes a New FX Program

Given the 32 percent devaluation of the bolivar in February, that Venezuela’s currency negatively impacted the earnings of companies doing business there shouldn’t be a big surprise. But those negative impacts may be exacerbated by uncertainty surrounding the exchange rate mechanism and capital controls since the death of former president Hugo Chavez and election of his long-time supporter Nicolas Maduro. What will the Maduro regime’s policies be vis-à-vis corporations’ ability to repatriate cash from their Venezuelan operations – and the price at which they can exchange bolivar for dollars?

From a currency perspective, Venezuela is a difficult place for foreign multinationals to do business because of strict capital controls and a huge gap between the “official” exchange rate and the black market rate.

It’s your money, but you can’t have it

Venezuela has strict controls on the repatriation of cash held there by foreign multinationals. Quoted in a recent Bloomberg report, Asdrubal Oliveros, a research director at Ecoanalitica in Caracas, said that overseas companies may hold about $12 billion in dividends in Venezuela that they can’t repatriate.[1] With the devaluation of the currency by a third, those funds are not only trapped, but worth less too. If strict capital controls remain, inflation stays high (it’s currently around 20 percent), and the government devalues the currency further, companies will face even steeper losses this year.

How much is your money even worth?

Foreign multinationals with cash trapped in Venezuela know that their funds are worth less – because of the devaluation and inflation – but how much? Venezuela’s controlled currency, the bolivar, officially trades at 6.3 to the U.S. dollar. But that “official” rate is only applicable to Venezuelan importers in certain “key” industries. And sometimes the government offers those importers a rate much weaker even than the official rate (as it did in March when it auctioned $200 million to 400 local importers at an estimated rate of 14 bolivar to the U.S. dollar). Then there is the black market exchange rate – currently estimated to be 24 bolivar to the U.S. dollar. So a company holding 1 billion in Venezuelan currency might have the equivalent of $159 million, or $42 million, or some amount in between.

So when a company with cash trapped in Venezuela is preparing its quarterly earnings reports, how does it value that cash? How does it determine when and at what value it might be able to repatriate the funds? Auditors may be forcing companies to use worst-case scenario exchange rates – 24 bolivar to the U.S. dollar or something like it. That may well be one of the reasons why so many companies are reporting such large negative impacts from the bolivar in the first quarter.

Change on the horizon?

Former President Hugo Chavez, who was ailing but still in charge when Venezuela devalued its currency by 32 percent in February, died in March. His heir apparent, Nicolas Maduro, narrowly won election to the presidency in April. Maduro campaigned on plans to continue and even deepen Chavez’s signature socialism (Chavez oversaw the nationalization of more than 1,000 companies or their assets and the imposition of strict currency controls). On that count, Maduro looks like more of the same – or worse.

But in late April Maduro appointed Nelson Merentes finance minister, in what local analysts called “a positive sign for the market.” Merentes is widely recognized to be more pragmatic than his predecessor Jorge Giordani. Analysts predict that Merentes will oversee more flexible foreign exchange policies.

Bottom line for companies

What Maduro and his ministers will do vis-à-vis the Venezuelan economy is still speculation. Assuming that they want economic growth, they’ll have to loosen capital controls. If they wait, the measures they take might be desperate – like ending the Petrocaribe energy agreement that affects trade across Latin America. Either way, multinationals need to prepare for greater volatility around the Venezuelan bolivar and, perhaps, more quarters with significant bolivar-related earnings losses.

Among the 37 FX managers from leading multinationals at the recent NeuGroup FX Managers’ Peer Group Summit, many had MBOs (management objectives) related to foreign exchange impact. Of those who had an MBO, it was agreed that the largest acceptable currency impact from balance sheet exposures alone was 1-cent of earnings per share (EPS). Some had MBOs much lower than that.

65% FX management program effectiveness? Not good enough

A decade ago, an acceptable outcome for a treasurer’s FX management program was 65% effectiveness (meaning that 65% or more of the company’s FX gains or losses were offset through risk management). Today, that’s no longer acceptable; 95% effectiveness is the new standard expectation among executives, and many companies are striving for – and achieving – 99% effectiveness.

The increase in expectations among executives follows two trends: 1) with increasing internationalization (increased currency exposure) and increasing currency volatility, 65% FX program effectiveness will likely result in a painful and unacceptable currency impact; and 2) with the introduction of cloud-based technologies, it is possible to manage currency risk to any threshold you set.

The new metric in town: Currency impact less than 1-cent of EPS

While FX program effectiveness is measured as a percentage, beginning over the past couple of years, executives actually are looking at open risk: if the treasurer’s FX program is 95% effective, what does the remaining 5% mean in risk terms?  Is that risk less than 1-cent of EPS? FX risk management has come a long way; now it is recognized that looking only at the effectiveness percentage – without looking at open risk – is not sufficient.

As companies’ currency exposures increase and as currency volatility increases, a less than 1-cent of EPS impact requires increasingly more effective FX management – for some companies, 95% effectiveness may not even suffice to keep currency impact below 1-cent of EPS.

Why a 1-cent of EPS target matters

Without good currency risk management, EPS is at risk. Risking earnings per share is dangerous business because investors tend to dump stock first and ask questions later when earnings fall short of expectations. Furthermore, reduced EPS means the company made less money, and therefore may have a reduced ability to, for example, pay dividends. That, of course, affects the stock’s value; and today’s earnings affect tomorrow’s share price.

CFOs need to prioritize currency exposure management because investors know that if a company has FX impacts greater than 1-cent of EPS, the company is not managing currency risk to the market standard, and is therefore likely to have continuing FX surprises. That uncertainty/lack of predictability impacts share price.

How to manage currency impact to less than 1-cent of EPS

Fortunately, managing currency impacts to your preset target – whether it is 1-cent of EPS or lower, or any other well-defined MBO – is possible. It requires the “Three M” approach:

1)    MEASURE: Proactively understand currency risk across the entire portfolio (all currencies impacting your financial statements) – accurately, and timely (within a short period of time of when you want to know – typically defined in minutes or hours rather than days)

2)    MANAGE: Manage currency risk to the acceptable and pre-agreed level – many companies are looking at this as an opportunity to become currency agnostic, because they understand that they’ll never know where next quarter’s currency surprises will come from (e.g. it could be Venezuela, Cyprus, Argentina, Japan – anywhere)

3)    MONITOR: Continuously monitor the FX risk management program, which is easily done via readily available and employable cloud-based technologies

Taking the “Three M” approach not only gives treasurers and FX managers – like the 37 we spoke with at the FX Managers’ Peer Group Summit – the confidence they need to manage currency risk to a preset threshold, but also gives confidence in the results to the Board of Directors, analysts, and investors that are continuously evaluating the share value of the company.

Now it’s back.

And once again, many multinational corporations have been surprised by the currency storm’s impact. Like during hurricane season, when everyone’s trying to figure out how to deal with aftermath of one storm (Venezuela’s devaluation of the bolivar), another comes barreling down (euro slide prompted by the crisis in Cyprus).

Here I’ll explain five things you need to know about what’s going on in Cyprus, how it intensifies currency volatility in the eurozone and beyond, and what you can do about it.

1.     The euro storm still rages, and Cyprus is emblematic of deeper issues in the EU. On March 25, the European Union, International Monetary Fund, European Central Bank, and Cypriot leaders agreed on a €10 billion bailout on the condition that Cyprus would close Cyprus Popular Bank and restructure the Bank of Cyprus. Deposits of up to €100,000 are insured, but those with larger sums in the banks may end up losing some of their deposits – about 40 percent, according to estimates by Cypriot officials.

The banking crisis in Cyprus has brought to the fore the deep fracture in the eurozone. Because of the combination of deep tensions between creditor and debtor nations and systemic instability that remains in Italy and Spain (which means that more bailouts could be on the table), the euro could still break up. The odds are low that it will happen in 2013, but relatively high that some country(ies) will exit or the monetary union will breakup altogether in the next three to five years.

2.     Euro volatility is back. No matter how the situation in Cyprus gets resolved, it has and will continue to create tremendous euro volatility. On March 28, the euro closed at €1.28 against the dollar, down 6.4 percent from its six-month high, set on February 4. Deutsche Bank has forecasted that the euro will fall to 1.20, and I’ve seen predications that it will fall as low as 1.10. All this volatility over a banking crisis in the smallest economy in the eurozone (at $25 billion, Cyprus’s annual GDP is 90 times smaller than Italy’s and 60 times smaller than Spain’s). Imagine what would happen to the euro if still-present systemic instability in Spain and Italy come to the fore again.

3.     Euro volatility could set off earnings warnings. Because the euro is the biggest currency exposure for most U.S.-based multinationals, if the euro hits 1.25, it will set off earnings warnings this next earnings season. The warning would be justified; when the euro falls relative to the U.S. dollar, it can have significant impact on multinationals doing any kind of business in euros – significantly negative impact if not managed appropriately (dollar up, revenue down).

4.     Managing currency exposure without an institutionalized system is like whack-a-mole – while you were trying to figure out Venezuela, here comes Europe again. The difficulty in managing currency risk is that risk arises from so many different currencies (most multinationals have hundreds of currency pairs). While companies, for example, were figuring out what to do about devaluation in Venezuela and capital controls there, the euro storm was resurging, and now corporates have turned their attention to Europe. Tomorrow, it will be another currency in another region.

In addition, volatility is created by other countries responding to the euro slide. Japan, for example, has worked very hard over the last four months to depreciate the yen; the euro’s fall makes that job more difficult, and Japan’s leaders will have to be even more aggressive to continue devaluation. In Switzerland, where policymakers have intervened in order to keep the country from becoming a safe haven for investors fleeing the euro, the central bank will also have to get more aggressive to maintain the relative value of the Swiss franc. Winning whack-a-mole is impossible for multinationals with hundreds of currency pairs in a world moving as fast as ours does.

5.     There is a solution. To avoid surprises, corporate treasurers need to watch the weather in every country they do business in. You can do that by proactively managing your currency risk across all of your currency pairs. Fortunately, there is a cloud-based technology solution that facilitates management of currency risk across your entire portfolio of currencies, and gives real-time, actionable information about where your exposures are – so you can manage the impact from Cyprus and all of the other currency storms to come at the push of a button.

As part of FiREapps’ ongoing effort to provide insight into how currency affects corporations, we have analyzed the earnings calls of a subset of the Fortune 2000 companies that have at least 15 percent or more international revenues in at least two currencies. The numbers we reveal here are top-line impacts reported during fourth quarter earnings calls by companies within that subset.

Key findings recap

2012Q4

• ŸIn the fourth quarter of 2012, 230 companies reported a negative revenue impact from currency fluctuations, a nearly three-fold increase over 2011Q4.
• ŸOf those 230, 109 companies quantified an impact; in aggregate the negative currency-related revenue impact was $4.2 billion in the fourth quarter of 2012, a nearly 5-fold increase from a year earlier.
• The 109 companies that quantified a negative currency impact faced an average headwind of 1.14 percent.

2012

• In 2011 the total net currency impact was positive, just over $21 billion. In 2012, the total net currency impact was negative, $50 billion. The net reduction in top-line revenue associated with currency impacts, then, was more than $70 billion over the two years.
• In total dollar terms we begin to see a sustained shift toward currency headwinds in the fourth quarter of 2011, with net negative currency impacts through the end of 2012.
• The drivers of currency headwinds have changed since 2011. Before, impacts came largely from a single currency. Now, they’re coming from a range of currencies in different parts of the world. This represents a trend that we expect to continue.

Read more about the impact currency volatility had on U.S.-based multinationals in the full report, which can be accessed here: FiREapps 2012Q4 Corporate Earnings Currency Impact Report. You’ll learn about how the perfect currency storm in the euro zone has become a global currency war (and what that means for corporates). You’ll learn about the top 5 currencies most frequently mentioned as impactful in earnings calls by quarter in 2012. And you’ll learn about how you can join the group of MNCs that do not face significant currency impacts because they proactively manage currency risk across their full portfolio of currencies.

Almost all of the media attention focused on the currency war recently has been on how dangerous it is. But that begs the question: if currency war is so bad, and it creates a competitive devaluation race to the bottom, why do countries engage in it? Currency wars are politically motivated, and politicians often find strong incentives to engage in competitive devaluation. Here’s why.

1) Competitive devaluation (currency warfare) can yield significant benefits for the countries that engage in it. The problem with currency warfare is that the beneficiaries of a country’s devaluation are the ones who hold the most sway over the policymakers who can control the exchange rate. In Japan, for example, the new prime minister was elected on a promise to devalue the yen. In Venezuela, the devaluation was seen by many as a way for ailing President Chavez to shore up support in advance of a potential election. Pressure from voters has continued to be more powerful than pressure from the international community.

In export-dependent economies, especially, competitive devaluation is often seen as an important policy tool. In a world as interconnected as ours – where the value of a currency in Latin America can affect the competitiveness of an Asian country’s exports – countries often say they have no choice but to engage in competitive devaluation as a protective mechanism.

That has been the case in European countries affected by, but not part of, the euro crisis. Currency manipulation in Switzerland, and talk of it in Sweden and Norway, for example, has been in large part designed to keep the currencies from becoming safe havens for investors fleeing the euro. When a currency becomes a safe haven, its value can rise rapidly, making the country’s exports less competitive globally.

In Norway, central bank Governor Oeystein Olsen said he would cut rates if the krone appreciates too much. Exports account for about half of Norway’s total economic output. Sweden’s central bank has so far resisted pressure to devalue the krona, though exporters there have reportedly complained that a relatively strong krona gives them a competitive disadvantage (which it does).[1] Switzerland has openly manipulated its currency since 2011 to dissuade use of the franc as a safe haven currency.

2) While the benefits accrue to home companies, foreign enterprises are the ones who are harmed. A few weeks ago FiREapps CEO Wolfgang Koester posted a blog about why Japan was engaging in currency warfare – and how its exporters were benefiting (It’s Yen Week, with Competitive Devaluation and Currency Wars Headlining). As the yen has weakened, Japan’s exports have become relatively more affordable (and thus more competitive) in global markets. In 2012, a Camry that cost $22,000 got Toyota 1.7 million yen. In 2013, the same $22,000 Camry gets Toyota 2 million yen – an 18% increase in revenue just because the currency weakened.

On the flip side, companies that compete with Japanese exporters – say, U.S. automakers – are harmed by yen-weakening policies, because their products become relatively less affordable (and thus less competitive) in global markets. In his 2012Q3 earnings call, the CEO of a Fortune 500 company told analysts and investors that a 1 point drop in the yen would decrease the company’s net income by $6 million. Doing the math, that would mean a $66 million negative currency impact, almost a quarter of the company’s reported net income. In that context, it’s easy to see why U.S. automakers have implored President Obama to take stronger action against yen devaluation (including, they have suggested, weakening the dollar).

3) For countries, the upsides and downsides of currency warfare might net out over the long run. Not so for companies. There are some who say that competitive devaluation is not harmful. In the long run, that might be true: because exchange rates are relative, if all countries devalue their currencies, the result is a wash; over time the gains and losses associated with currency warfare net out.

But multinational corporations don’t have the luxury of waiting out the currency wars; they can see significant currency-related impacts at the end of every quarter. And when those impacts cause companies to miss their quarterly numbers (as they have; stay tuned for our 2012Q4 currency impact report), the impact carries over to earnings per share. So while economies may not be damaged by currency wars over the long term – provided that they engage in the competitive devaluation – the corporation’s quarterly reporting cycle is very sensitive to currency volatility.

So what can multinational corporations do? Become currency agnostic – manage currency risk across your entire portfolio of currency pairs so that no matter where the next hotbed of currency warfare is, you’ll be able to manage the associated currency risk. As I wrote last week, fortunately with cloud-based exposure management technology that kind of management can be done at the push of a button.

1. “Coming” currency war? We’re already in one. Despite what the G20 says publicly, over the last 18 months we’ve seen significant competitive devaluation from nearly every continent. Consider:

• ŸBrazil: Brazil began operating a “dirty float”, much like China does, which allows the real to float within a tight band of about BRL$2 to BRL$2.10 to the dollar. Finance Minister Guido Mantega claimed the shift was a necessary reaction to other countries’ currency manipulation, commenting: “If the whole world is going to manipulate their exchange rates, we will too.”[1]
• Ÿ Venezuela: On February 13, the Venezuelan government devalued the bolivar by 32 percent, a move aimed to bolster the country’s oil exports and bring more money into government coffers ($13.4 billion more, cutting the government’s budget deficit in half).[2]
• Japan: A commitment to yen-weakening policies was a centerpiece of newly elected Japanese Prime Minister Shinzo Abe’s campaign. Now at about 94 per U.S. dollar, the yen has declined 18 percent in the last year. Japanese officials have said that they will continue active monetary policy at least until the yen reaches 100.
• South Korea: After the Bank of Japan pledged to buy government bonds in potentially unlimited quantities, officials in South Korea, where many manufacturers compete with the Japanese, said that they would consider a policy response to a weaker yen. Bank of Korea Gov. Kim Choong-soo said that a sharp drop in the yen could provoke an “active response to minimize any negative impacts on exports.”[3]
• Switzerland: Switzerland has openly manipulated its currency since 2011, pegging the Swiss franc to the euro in an effort to dissuade use of the franc as a safe haven currency in Europe (as that would increase the value of the franc and make Switzerland’s exports less competitive).
• United States: In the U.S., the result of three rounds of quantitative easing – where the Fed prints money to buy trillions of dollars’ worth of mortgage-backed securities and treasury bills in order to stimulate the economy – are widely considered to have the effect of  weakening the value of the dollar.

These are just some of the more obvious examples of the countries involved in the global currency war. A report last summer from the Washington-based Peterson Institute of International Economics, for example, identified 20 countries as “the most egregious currency manipulators.”[4]

2. The G20’s proclamation against exchange rate manipulation is not only disingenuous; it’s dangerous. At the meeting of the G20 last week in Moscow, finance ministers from the world’s most powerful countries openly rejected the notion of currency wars and publicly “agreed” to not engage in competitive devaluation as a tool for economic stimulus. Yet considering the kinds of highly manipulative activities noted in the list above – many by G20 members – the G20’s proclamations are incredibly disingenuous.

What’s more, they’re dangerous. The G20’s misleading representation of their true intentions vis-à-vis exchange rate management put the markets on edge. In this environment, even small shots fired in the currency war can create big shocks in the market, and big impacts on corporations.

3. Currency war is the new norm; uncertainty and risk is the overarching issue for corporates. That currency wars are impacting MNCs (often significantly) is not an aberration; this is the new norm, and every year it’s getting worse. The overarching issue for corporates, then, is continued uncertainty and risk. In the last 18 months we’ve seen currency impacts from the euro, yen, Latin American currencies, and the yuan – the battlegrounds are constantly shifting. What we’ve learned is that we don’t know where the next impact will come from; it could be anywhere.

But when the impact does arise, it arises quickly. For example, even before Venezuela announced its plans to weaken the exchange rate by 32 percent, top executives from leading multinational companies (especially CPGs) warned that a bolivar devaluation would reduce their earnings outlook.

Multinational corporations that have not become currency agnostic are seeing significant currency surprises for two reasons: first, is increasing internationalization, which opens MNCs up to greater currency exposure. Second is heightened currency volatility caused by the raging currency war. In this environment, currency risk management is critical. Fortunately, with cloud-based exposure management technology that kind of management can be done at the push of a button.

That the Venezuelan finance minister announced the devaluation at the end of the trading day on Friday, ahead of a two-day banking holiday, caught markets off-guard. It shouldn’t be a surprise, though: this is open warfare in the currency markets, and in this war we often see central banks move at the end of a trading week or the end of the year (as Japan did the last week of 2012). They move then because it’s an inopportune moment – like attacking when the other side is sleeping.

Who it affects

The Venezuelan government probably doesn’t view this huge competitive devaluation as an act of currency warfare, but for the countries, and the companies, affected, the impact is the same. The casualties of this war are the multinational corporations that have not taken steps to manage currency risk. In the case of Venezuela, consumer packaged goods companies – not typically active at hedging currency risk – have been and will continue to be hit particularly hard.

Even before Venezuela announced its plans late last week, top executives from leading multinational CPG companies warned that a bolivar devaluation would reduce their earnings outlook. As we’re analyzing earnings reports and analyst calls for our quarterly impact report, we’ve seen a number of top executives talk about impact from the bolivar. Among them:

• Ÿ  Colgate-Palmolive – “As we discussed on the last call when I said that a significant devaluation (incident) in Venezuela, along with price controls would weigh heavily on our results, we were quite straightforward in our release in saying that the double-digit in dollar terms guidance was absent a macroeconomic devaluation in Venezuela, and that continues to be our view.”
• Ÿ  Avon – “We estimate the one-time P&L impact [of bolivar devaluation] on quarter 1 results to be approximately $50 million…Additionally, hyperinflationary accounting requires us to carry some nonmonetary assets…at historical cost, where our sales are reported at the devalued rate. We estimate this will have an impact of approximately $50 million in 2013…On a reported basis, sales were down 1%, impacted by currency.”

Other companies outside the CPG sector have also forewarned analysts about potentially significant impacts related to the bolivar devaluation:

• Ÿ  Ford – “We’re expecting very substantial adverse exchange effects from an expected significant devaluation in Venezuela and we are also thinking that we’ll see a substantial weakening of the currency in Argentina that’s going to affect us.”
• Ÿ  Goodyear – “The foreign exchange impact that we expected a year is a negative impact of 40 million to 60 million. Significant part of that driven by the situation in Venezuela, but I’ll say that it is early enough on that we are still evaluating Venezuela, so not easy to pin that down with any precision at this point.”

This is not likely to be the last bout of competitive devaluation in Venezuela; analysts have already predicted that the country will have to devalue again within the year. And it’s not just Venezuela; globally, this is just another battle in a currency war that will continue to rage.

The ongoing currency war is exactly the reason that multinational corporations need to take the approach we’ve been talking about: a portfolio approach to managing currency risk. Last year it was the euro. Last month it was the yen. Now it’s the bolivar. Where will currency impacts come from next? Instead of trying to guess, manage risk across all of the currency pairs you do business in.