For a year and a half, the two most commonly cited headwinds facing blue-chip U.S. companies have been low oil prices and a soaring currency.
While the first has yet to fully dissipate, foreign exchange fluctuations may soon serve as a net boost to corporate America, according to Bank of America Merrill Lynch.
A lofty greenback depresses the dollar value of revenues multinationals earn overseas. On a conference call that followed Apple Inc.'s recent earnings report, Chief Executive Officer Tim Cook indicated the U.S. dollar's broad strength shaved 15 percent off the value of sales made abroad on a sequential basis.
Both the top and bottom line performance of companies with sales outside the U.S. would be buoyed in the event the U.S. dollar–as measured by the spot dollar index (DXY)–stays where it is, snapping a six-quarter streak in which the greenback's strength adversely affected results relative to the previous year:
"Should the USD remain at current levels through 1Q we estimate that the effect of currency translation turns from a headwind of 10 percent appreciation to a (small) tailwind from a 2 percent depreciation–easily the most favorable improvement in a long time," explained credit strategists Hans Mikkelsen and Yuriy Shchuchinov.
The proximate cause of the U.S. dollar's broad-based retreat is tied to the collapse in two-year Treasury yields from nearly 1.10 percent at the tail end of 2015 to below 0.65 percent in February.
There's a somewhat circular logic here, but market participants have been of the view that tightening financial conditions (primarily, the rise of the U.S. dollar, sinking equity prices, and widening credit spreads) would dampen the U.S. growth outlook and limit the extent to which the Federal Reserve was able to diverge from other major central banks.
Everything else being equal, foreign exchange traders would prefer to own a higher-yielding currency. When Treasury yields fall by more than yields on other sovereign debt, it's a net negative for the U.S. dollar.
As a caveat, another, wider measure of the U.S. dollar–the trade-weighted broad dollar index–would still be up about 6 percent if it ended the first quarter at its current level.
Because of this distinction (and the time remaining in the first quarter), we can't yet be sure whether foreign exchange fluctuations will be an aggregate boon on an annual basis. To be sure, the effect will vary depending on a company's geographic mix of revenues.
If you're a corporate executive, this isn't the ideal way to get a softer greenback; it'd be better if this were a function of strength in other currencies in light of an improving growth outlook. But the Tim Cooks of the world would be hard-pressed to complain too much about these foreign exchange moves.
At the very least, barring a substantial rally, the U.S. dollar will be much less of weight on quarterly financial performance than during the fourth-quarter earnings season.
"If the global economy remains stable–consistent with what we are seeing in global manufacturing PMIs–we expect improving earnings and revenue growth in 1Q," conclude Mikkelsen and Shchuchinov.