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Global Currency Tensions on the Increase

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Procurement, sourcing and B2B fulfillment teams need to be aware of building currency turbulence involving multiple global regions, especially Latin America and Japan.

The government of Venezuela has de-valued its currency by 30 percent and certain manufacturers are already impacted by the effects.  The Wall Street Journal reported earlier this week that Venezuela’s exchange rate was expected to drop from 4.30 bolivars to the dollar to 6.30 bolivars per dollar. Consumer products manufacturer Colgate Palmolive indicated earlier this week that it will take a one-time charge of $120 million related to the Venezuelan currency devaluation. The WSJ pointed to Clorox and Procter and Gamble has potentially being impacted because of their sales exposures in that country.

The Financial Times reports this week that the Group of Seven nations took the unusual step of issuing a public statement to address rising concerns over “currency wars”.  Particular emphasis was made in the direction of Japan where the yen has been falling at a rapid rate to reinvigorate growth among Japan based manufacturers. The FT also reported that currency war fears are spreading across Latin American nations such as Chile, Colombia, Mexico and Peru who fear that currency shifts will endanger their own economies. Last week, Chile’s finance minister lamented that devaluations of global currencies brought about from quantitative easing could lead to new forms of trade protectionism.  Many of these same nations enjoyed a boost from high commodity prices during the past few months.

All of these current building tensions lead up to a meeting of G20 finance ministers and central bankers in Moscow scheduled for tomorrow. There are fears that Japan will take strong actions to curb deflation which could lead to a large sell-off in the Japanese yen.  Asian exporters such as China and South Korea are worried about currency appreciation and so are the many Latin American countries that provide key commodities to industry supply chains.

The takeaway for procurement and sourcing teams is to insure, where feasible, either that some currency de-valuation protections in existing or new purchase contracts, or that analysis is made of potential cost scenarios under certain currency devaluation.  The cost of materials may well be very dynamic in the current months as various countries maneuver to protect their economies and currencies while global bodies attempt to exert broad influence.

Teams need to insure that proper expectations are set with senior and other management that the potential for further currency related turbulence is becoming a possible scenario.

Bob Ferrari

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  1. Bob Ferrari says:

    Hello Everyone,

    This is an update to the above commentary on global currency turbulence.

    Yesterday, Procter and Gamble stated that it also expects to record one-time charge of $200 million to $275 million due to Venezuela’s surprise devaluation. The charges will be reflected in P&G’s 2013 earnings. P&G further indicated that the new devalued exchange rate will affect transactions involving the import of finished products and raw materials.

    Bob Ferrari