Does a Strong Dollar Mean Poor Results?
The current U.S. Dollar strength surprised many, given the recent loose monetary policy of the “QE Era” Fed. Hedgers, however, know that the expected change is rarely the same as actual change in currency markets today.
At last look, the Yen was trading at 117, the Euro 1.18 and the Canadian Dollar at 1.20. How times have changed in such a short period! It wasn’t too long ago that Yen was in the 80s, Euro was pushing 1.40 and CAD was actually stronger than the USD.
This dramatic shift is precisely why our clients (and most corporations) hedge their currency risk; today’s benefits are gone tomorrow, and vice versa. Hedging your currency risk won’t insulate you entirely from these currency moves, but it will provide several critical advantages.
First and foremost, hedging provides a “view” to currency changes. It is a time machine of sorts that allows your company to “see” currency changes before they impact your financial results. For example, if I locked in EUR revenues last year at 1.38, I can enjoy that rate today and can prepare for EUR 1.18 in 6-12 months’ time. I’ve actually slowed the currency process down enough to manage the risk more strategically. I can now reduce costs, or even accelerate them, depending on my hedge rate and margin targets.
The second advantage of hedging (and hedge accounting) is that it provides us with what we call “P&L geography” benefits. The hedge at 1.38 not only allows me to use that rate in the future, but I also have the ability to put the effect of the hedge directly into revenue (or costs). This turns my “accounting rate” experienced in revenue from the current rate of 1.18 to the hedge rate 1.38.
Whether a strong dollar is beneficial or not to your firm an ongoing consistent hedge program can provide a few more levers to add shareholder value to your firm.