IBM and the US dollar
IBM’s (IBM) significant revenue generation outside the United States exposes it to the vagaries of the US dollar. Let’s see how the dollar could play a major role in the company soon-to-be-announced fiscal 1Q16 results. As we’ve covered in other series, the dollar has played a role in IBM’s revenue decline .
IBM derives more than half of its revenue from outside the United States. That’s why the strengthening of the US dollar (UUP) against major currencies impacts its revenue growth. Oracle (ORCL) and Microsoft (MSFT) also generate more than half of their revenues from outside the United States. The US dollar has become a bane for them all.
Fed’s cautious approach and global growth concerns are weighing heavily on the US dollar
On April 7, 2016, the Fed’s cautious approach coupled with concerns about global growth pushed the dollar to 107.7 against the Japanese yen (DXJ), a 17-month low. Before that, on March 16, 2016, the Fed kept the policy interest rate steady between 0.25% and 0.5%. The Fed also signaled a less hawkish monetary outlook for 2016. It suggested that it would likely raise the interest rates two times in 2016 instead of the previous estimate of four. The Federal Reserve’s cautious move weakened the US dollar (UUP).
If you look at the above graph, it shows the performance of the PowerShares DB US Dollar Bullish ETF (UUP), which follows the price movements of the US dollar. Since the beginning of 2016, the US dollar has been on a decline with occasional ups.
According to a Reuter’s poll, strategists believe the US dollar faces more downfalls in the future. If this turns out to be true, the pressure on IBM’s falling revenues should ease.
In the next part, we’ll see what effect BRIC[1. Brazil, Russia, India, and China] could have on IBM’s fiscal 1Q16 results.