Higher U.S. interest rates will continue to ensure that capital will flow disproportionately into U.S. Dollars at the expense of other countries and currencies. For companies that sell into the U.K., Germany, western Europe in general as well as Japan, this means that Reported Revenue will be haircut in future quarters as local currency is translated into the reporting currency (U.S. Dollars). I am not confident that Sell Side Analysts have factored recent FX trends into their Q4 2022, 2023 and out-year estimates.
FX headwinds are a problem on a couple of levels. First, companies could disappoint versus analysts’ estimates if analysts don’t adjust for currency. Second, those companies that get hit hardest by FX headwinds will screen poorly in terms of reported revenue versus competitors that don’t have similar currency exposure (Bloomberg and Factset post the reported GAAP financials, not the constant currency figures, which creates a negative narrative for those companies with the most currency exposure).
FX trends are likely to get worse for non-USD currencies. It would seem based on recent actions that the Fed will raise rates faster than other countries, which would drive demand for Dollars as investors seek higher rates of return and a safe haven. The Fed will take its policy rate north of 5% by Q1 2023 in our view. Meanwhile, the Bank of England surprised markets last week when it raised by 50 BPS versus the expected 75 BPS (and now faces market pressure to raise by another 25 BPS this week).
GBP, EUR and YEN versus the USD: For the June quarter the GBP averaged approximately 1.257 USD. That exchange rate is approximately 1.181 for the September quarter, a 6% decline in the value of the GBP versus the USD. Today that FX rate stands at 1.084, a further 8% decline versus the September quarter average. Analysts therefore should use the 1.084 FX rate when estimating revenue and expenses for the U.K. market for the December quarter. The EURO tells a similar story as does the Japanese Yen. The graphs below plot the USD versus the GBP, the EUR and the YEN over the past 180 days (source: https://www.oanda.com/fx-for-business/historical-rates; TEK2day). These FX movements are not common. I’ve never seen anything like it in my 27 years following markets.