How do you think escalating currency wars will affect MNCs?

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. 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. Avon, for example, estimates negative currency headwinds of 1% on sales. Colgate-Palmolive announced that bolivar devaluation would “weigh heavily” on their results.

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. As we saw with the G7 announcement last week, the group’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.

So what’s the bottom-line message for MNCs? It is that the combination of their continued desire to grow internationally and heightened currency volatility means that investment in fx risk management is critical.