Currency

Securities react sensitively to each earnings report a firm releases. However, before each earnings report is made public, a gray fog of rumors or estimates about this report already envelops the underlying company. Most firms announce their own projections for the next quarterly earnings report based on the current economic activity the company is under. However these estimates may or may not hit the mark and some could pull off a surprise whether good or bad. You might hear a company announce that it expects weaker revenues due to a strong currency or a weakening foreign currency whatever that might be. You might wonder why a strong currency would hurt their revenues when the word “strong” sounds like a good thing for consumers.

Currencies play a major interest on company earnings. When a company in the United States has to import materials from Japan, it has to buy the exporting firm’s currency to facilitate the trade since Japanese firms can’t use Dollars to buy goods in their local economy. A strengthening currency does increase the local currency’s buying power; however, this makes the strong currency a lot expensive on the export side. The firm on the importing country would find prices of goods too expensive for the quantity they needed and would either cut back on volume up to what the allotted budget can cover, or increase their cost to acquire the same amount of goods that would ultimately squeeze their profit margins. Basic business tells us that cost should always be as low as possible in generating revenues to attain maximum profitability and efficiency. If the importing firm’s cost has to go up in order to acquire the same amount of goods to produce the same amount of revenue, then their profits or earnings would obviously suffer. To compensate for this change, the firm might either raise the price of its final product or turn elsewhere to get the same goods or raw materials at a much lower price. If the importing firm chose to turn elsewhere for the same goods at a cheaper price, then the exporting firm’s revenues would fall so as its stocks when the balance sheet registers this weakness due to a strong currency. A weaker currency does the opposite where it strengthens exports as it is now cheaper for importing firms on a country with a stronger currency to buy the same amount of goods or even increase the quantity when the currency is weak enough.


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