Euro Hedging Jumps as Europe Exporters Bemoan Gains: Currencies
The euro’s unexpected rally this year is spurring a jump in hedging as the currency’s strength threatens to damp earnings at companies from Deutsche Lufthansa AG (LHA) to luxury-goods maker LVMH Moet Hennessy Louis Vuitton SA. (MC)
Daily trading in options designed to hedge gains in the currency rose 4 percent in the year through September to an average 25,105 contracts, according to CME Group Inc., the largest derivatives exchange. The euro climbed to an almost two-year high of $1.3822 today, above the year-end estimate of $1.27 in a January survey of strategists and economists by Bloomberg.
Even with hedges in place, German airline Lufthansa cited the strong euro when its profit estimate this week fell short of analyst forecasts, while LVMH said Oct. 16 that the currency’s gains versus the dollar and Japanese yen shaved 6 percent off third-quarter revenue.
“As the currency market moves into new territory, companies re-evaluate their positions and play catch-up by raising their hedging positions,” Ross Niland, the London-based head of northern European foreign-exchange corporate sales at JPMorgan Chase & Co., said in a phone interview yesterday. “But there’s still some sense of complacency out there. Companies tend to react to market moves and put protection in place a bit too late.”
Europe’s common currency has climbed 6.7 percent against a basket of its nine major peers this year, more than the others, as the euro region emerged from a record-long recession, Bloomberg Correlation-Weighted Currency Indexes show.
Unilever, the British-Dutch maker of Magnum ice cream, and Paris-based water company Suez Environnement, today joined Lufthansa and LVMH in saying the exchange rate dented earnings.
Lufthansa said Oct. 22 that this year’s operating profit will be 600 million euros ($828 million) to 700 million euros, below an estimate of about 918 million euros by analysts surveyed by Bloomberg. The Frankfurt-based company, which is scheduled to release earnings for the first three quarters of the year on Oct. 31, said the euro’s gains versus India’s rupee contributed to the shortfall.
“We generally hedge currency risks from projected operational exposure, including the Japanese yen, in different layers over a rolling period of 24 months by futures contracts,” Claudia Lange, Lufthansa’s head of corporate and financial communications, said in an e-mailed response to questions on Oct. 22. “The average hedging level is usually at 50 percent.”
LVMH, whose Louis Vuitton brand’s founder built his reputation as a luggage-maker for the wife of Napoleon III, said it has hedged 90 percent of its euro-yen exposure for this year and about 66 percent for next year. The largest luxury goods maker, which also produces Moet & Chandon champagne and Hennessy cognac, announced third-quarter revenue of 7.02 billion euros, compared with 6.9 billion euros in the year-earlier period.
“The growth in this year’s third quarter was significantly offset by a large negative currency impact,” Christopher Hollis, the head of financial communications at the Paris-based company, said on an Oct. 16 investor conference call. “The weakness of the yen, in particular, the dollar compared to last year, resulted in a negative 6 percent impact.”
The euro’s advance against a basket of its peers compares with the dollar’s 1.5 percent gain this year and an 11 percent drop in the yen, data compiled by Bloomberg show.
Companies looking to the European Central Bank to cut its main interest rate from a record-low 0.5 percent to weaken the common currency will wait in vain, according to Henrik Gullberg, a strategist in London at Deutsche Bank AG, the world’s biggest foreign-exchange trader.
“The euro probably has room to appreciate further,” Gullberg said in an Oct. 22 interview. “The ECB’s mandate is to focus on price stability and not on the currency” and “I don’t think inflation’s at the point where the ECB would consider taking action,” Gullberg said.
Euro-area inflation remained below the ECB’s 2 percent ceiling for an eighth month in September, the European Union said Oct. 16. Consumer prices rose an annual 1.1 percent after a 1.3 percent increase in August. The central bank forecasts the rate will average 1.5 percent this year and 1.3 percent in 2014.
The euro has strengthened 4.6 percent versus the dollar this year, and was at $1.3803 as of 7:15 a.m. in New York. It has surged 17 percent against Japan’s currency, heading for its best year ever. It touched 135.51 yen on Oct. 22, the strongest level since November 2009.
The average notional daily value of options on CME that hedge against the euro’s advance rose to $4.04 billion in September, the most since March.
Volumes of CME’s so-called European-style options, which carry restrictions on when they can be exercised and may be favored by companies more bullish on the common currency, surged 30 percent in the year through September to 288 contracts a day. The Chicago, Illinois-based exchange operator doesn’t specify whether the buyers of the contracts are companies.
Keith Nichols, chief financial officer at Amsterdam-based chemicals producer Akzo Nobel NV (AKZA), the maker of Dulux paint, said Oct. 21 that a 5 percent drop in third-quarter revenue was “primarily driven by the unfavorable currency effect as the euro strengthened.”
On the same day, Walldorf, Germany-based SAP AG (SAP), the biggest maker of business-management software, warned that if the euro remains at levels seen in September, its software sales will be 5 percentage points lower than otherwise. The euro averaged $1.3362 in September.
A recovering economy is stoking a rally in the euro, which as recently as July 2012 was in jeopardy of breaking up amid the region’s sovereign-debt crisis.
The euro area emerged from its longest recession this year, with the economy growing 0.3 percent in the second quarter, official data showed Sept. 4. The region posted a current-account surplus of 17.4 billion euros on Oct. 17 for August, up from 15.5 billion euros the previous month. As recently as October 2011, it was running a deficit in its current account, the broadest measure of trade because it includes investments.
The Frankfurt-based ECB has also boosted confidence by offering to buy indebted member states’ debt, though it hasn’t yet had to implement the program, sidestepping the currency-depreciating money-printing policies of the U.S. and Japan.
Analysts have raised their predictions for the euro’s year-end level to $1.33, according to the median of more than 60 estimates compiled by Bloomberg. A stronger currency risks damping growth, which is still forecast by economists surveyed by Bloomberg to shrink 0.3 percent this year.
“Europe will not want the euro strength to continue,” David Bloom, the global head of currency strategy at HSBC Holdings Plc in London, wrote in a note to clients. “What little recovery we’ve seen in the euro-zone economy has been driven by the swing in net trade. With unemployment likely to remain high, a further revival in exports will be critical.”