With second-quarter earnings season coming up, could investors actually be overestimating the deleterious effects of a strong U.S. dollar?
A rising greenback is famously bad for companies that sell products overseas, given that it theoretically forces them to either raise prices abroad, or take home fewer dollars for each unit of foreign currency received.
In the first quarter, it weighed on the results of many global companies, and was even seen as decreasing U.S. GDP growth in the period. More recently, Oracle blamed the rising dollar for its disappointing earnings and revenue results.
But Boris Schlossberg, a currency and macro trader at BK Asset Management, says fretting over the dollar's potential impact on second-quarter earnings would be a mistake.
"Just as we underestimated the impact of a strong dollar in Q1, we're maybe overestimating it in Q2," Schlossberg said Thursday in a "Trading Nation " interview. "A lot of [multinationals] have made the adjustment from Q1 to Q2 to hedge some of their positions, and we haven't had the kind of [currency] volatility we had in Q1. So I do expect some impact, but not nearly the kind of impact we had in Q1 on earnings."
A case-in-point came in Thursday's earnings release from Nike. The company managed to expand revenue and earnings in the three months ended May 31 and beat estimates, despite a seriously negative currency impact that surpassed some analysts' expectations.
The company reported revenue in Western Europe fell 3 percent compared with the March-to-May period in the year prior; on a constant-currency basis, revenue rose 17 percent. The story in the smaller Central and Eastern Europe and Japan segments was similar, with three-month revenue growth of negative 3 percent versus positive 20 percent in constant currency, and 2 percent versus 19 percent gains in constant currency, respectively.
For the entire company, revenue was up just 5 percent, compared with a 13 percent gain had 2014 exchange rates remained in effect.
However, the impact on earnings was smaller, thanks to foreign-currency related gains, which appear to add up to about $58 million (though the nongranularity of Nike's earnings report makes it impossible to know the exact size of its currency hedging gains).
"They're as good as it gets when it comes to doing that," said Sam Poser, who covers the stock for Sterne Agee CRT.
And indeed, as long as corporate finance officers do their jobs well the strong dollar may not be a sufficient reason to stay away from multinationals come earnings season.
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