Currency movements: The top and bottom of it

Given the shifts seen in 2025 to date, what are the effects of currency movements and foreign exchange (FX) hedging on company top and bottom lines? We explore this nuanced topic, and look at which sectors/company types are best positioned to ride out the currency volatility.

Like everyone else, CEOs and CFOs manage currency risk with FX futures, swaps and options, using every possible and imaginable finesse. However, no normally constructed non-financial company speculates on expected currency movements; instead, they tend to hedge the projected cash flows for the next 12 months, rather than the top-line, in order to benefit from a form of ‘natural hedge’ due to the coincidental evolution of local currency-denominated costs and revenues. Ultimately, the primary objective is to smooth and spread out the impact of exchange rate movements on a company's results over time, whether positive or negative.

Since the start of 2025, the euro has appreciated by more than +10% against the US dollar¹. However, this won’t be reflected in full in 2025 or 2026 results given they will show the effects of changes in average rates from one year to the next. On which note, the picture is quite different, with an average €-US$ rate of 1.08 in 2024 compared to an average rate for the same currency pair of 1.09 at present¹.

In a nutshell, the real impact on results boils down to the difference in cash flows denominated in each currency between the average effective rate for the current year, and the average effective rate for the previous year.

Looking at the long term, during periods of strong euro appreciation, such as between 2003 and 2007, when the euro appreciated by nearly 50% against both the US dollar and the Japanese yen, the annual hedging cost for an international group such as LVMH was, on average, less than 1% of EBIT margins¹.

The impact of currency movements on the top line and final demand is the key, and this cannot be avoided, at least not through currency hedging. This sensitivity of demand to currency movements can be significant, and is all the more important for companies with largely domestic manufacturing facilities, but whose sales are largely international.

Based on empirical analysis of the price elasticity of the main European export sectors, along with recent indications provided by the continent's largest companies, a +/-10% movement in the single currency has a -/+1% impact on revenue growth². This sensitivity of demand is likely to increase with concerns about inflation, the risk of customs tariffs and economic uncertainty, particularly for sectors exposed to strong import competition.

Yet in the space of a few weeks, we have gone from an environment where a fall in the euro led to a 1% increase in revenue growth, to the opposite now³. It can have a material impact.

Consider a company, let’s say in the European automobile sector, with expected organic sales growth of +4% – with a +2% contribution from volume and +2% from price – and a large portion of its manufacturing and fixed costs denominated in the euro. If the euro depreciates by 10%, this will lead to a +1% increase in sales growth. And the company’s margins will also fare in a more favourable way, as euro-denominated costs will fall. Conversely, if the euro appreciates, sales growth will fall by -1% to -3%. Meanwhile, the cost base will tend to increase more sharply due to fixed euro costs, coupled with the effects of wage and rent inflation. In this case, there is a risk that the company will reduce its semi-fixed expenses, such as marketing, thereby jeopardising its long-term sales growth.

Another theoretical example could be a high-margin, export-heavy, European luxury goods company. Let’s say the company has expected organic growth of 15%, with an equal contribution from volume and price effects, with production facilities and fixed costs also largely in euros, but whose margins are high. A decline in the euro will help sales, but above all, a euro appreciation should not have too significant a negative impact on sales, as sales in these business models tend to be more influenced by supply dynamics than demand. Similarly, the company's margins should be relatively unaffected, as these types of company enjoy significant pricing power.

So, what does this mean in reality? Well, transactional companies (those that aim to serve as many customers as possible by standardising their services) are likely to seek to offset the impact of exchange rate movements on their turnover by producing locally. Hence the appeal of business models such as those of Michelin and Essilor Luxottica, whose production sites are spread across Europe, the US and Asia.

Meanwhile, companies with the lowest price elasticity, such as Hermès and Ferrari, are also particularly valued. At the same time, certain luxury goods such as high-end cars, watches and certain fashion and leather goods seem to be benefiting from the Veblen effect, whereby demand for a good increase as its price rises.

Given the expected developments in FX markets and the spectre of higher import taxes, it is these two types of companies that we are currently favouring in our equity portfolios.