Two-year Low for Euro May Spell More US Earnings Trouble
Fresh two-year lows for the euro may spell trouble for U.S. companies this earnings season and prompt pessimism for third-quarter guidance from major multinationals.
The euro traded just below $1.22 in U.S. trading on Thursday, down 17.5% from the 2011 highs in April. The currency broke through options barriers in European trading earlier in the day. Additional options barriers near the $1.20 level could hinder the sharp decline. Yet a series of lower lows since 2008 now have the currency spread's six-year lows from June 2010 clearly in sight.
Volatile currency moves are doing more than impacting traders and tourists, though. U.S. multinational companies are starting to blame the euro's fall relative to the dollar for lower-than-expected earnings.
Nike (NYSE: NKE) issued its earnings warning in late June, and said it continues to see currency pressures in Europe--in addition to fluctuating labor and commodity costs. The company had beaten analyst targets in 17 of 18 previous quarters.
Procter & Gamble (NYSE: PG) also blamed the a negative currency translation from Europe for part of its earnings warning last month. Currency is likely to affect other U.S. multinationals reporting for Q2.
The problem could be exacerbated for those and other companies in future quarters should the euro fall below the 2005 lows near $1.17. Below that point, there is minimal price support to keep the currencies moving ever-closer to par.
Volatile global currency moves in recent months have everything to do with the euro zone debt saga. It has pushed traders away from the euro and other risky currencies. Instead, traders have favored the Japanese yen, and to a lesser extent the U.S. dollar, as safe havens.
The latest breakdown happened following the release of Federal Open Market Committee minutes on Wednesday afternoon that put a damper on QE3 expectations. Additional quantitative easing by the central bank of the world's largest economy might have swayed investors and traders toward riskier assets, including the euro. The Fed's wait-and-see attitude on QE now has both the yen and dollar rallying. The European Central Bank's decision to lower rates late last week did not help either. The cut tended to support a stronger dollar and yen, as both the United States and Japan have held rates steady.
Should the euro's decline continue, it may favor U.S companies with less exposure to currency effects.
Take the luxury retail sector as an example. Companies such as Coach (NYSE: COH), which has a U. S.centic business, might be at an advantage to companies such as Ralph Lauren (NYSE: RL), which reported in May that it expects Europe's economic problems to affect its sales.
Other companies with little exposure to currency effects include utilities such as Exelon (NYSE: EXC), telecom stocks such as AT&T (NYST: T), retailers including Dollar Tree (NASDAQ: DLTR) and CVS Caremark (NYSE: CVS), transportation stocks such as CSX Corp (NYSE: CSX) and Norfolk Southern (NYSE: NSC), U.S-centric hospital stocks such as Community Health Systems (NYSE: CYH), and a range of small caps.
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