The Natural Tide of Currency Change

The FX Effect is something you only need to worry about if you do business in multiple currencies. It’s not the most critical factor for gaining insight, but it matters because, as you’ve seen in other posts, we’re working to isolate each piece of the revenue story. FX helps us clear away potential confusion and make sure we’re telling that story accurately.

Take an example: suppose we sell to a company in Brazil. Brazil has historic inflation of about 6.1% per year, so the currency loses a little value each year. In the base year, we sell a $100 widget, priced at R$533 (5.33 per dollar). In the current year, the new price is $108.10, and the Brazilian price is R$600 (5.55 per dollar).

At first glance, the price uplift looks like $8.10. But once we account for FX, the uplift effect realized is  actually $ 3.63. Here’s the math:

Step-by-step breakdown:

  • Compute the current ASP in local terms adjusted to USD:

    • ASP (LOC current) * [Total_Rev (USD current)  / Total_Rev (LOC current)]

    • Example 600 * (108.10/600)
  • Compute the base ASP in local terms adjusted to USD:

    • ASP (LOC base) * [Total_Rev (USD base) / Total_Rev (LOC base)]

    • Example 600 * (100/533)
  • Subtract the base-adjusted ASP from the current-adjusted ASP.
    • Example (108.10-112.57)
  • Multiply the difference by the current quantity in the current period.
    • Example -4.47*1 = $-4.47

What this shows is that the price uplift isn’t as large as it first appeared. FX pulls out those effects and allocates them to the right places, so we don’t misinterpret what’s really happening.

A Tide Analogy

Think of FX like the natural tide changes on a coastline. Picture a beautiful beach tucked below cliffs, enjoyed by both locals and tourists. The tide (FX) rises and falls. A higher tide doesn’t change how good the beach is, but it does change how many people can reach it.

  • When the tide is high, the path is covered, and tourists hesitate. That’s like a high FX rate making things more expensive.
  • When the tide is low, everyone can get there easily. Suddenly the locals who once had the beach to themselves are surrounded by crowds. That’s like a low FX rate making things cheap for everyone.

The distance to the beach hasn’t changed — but the tide makes all the difference.



Why It Matters

We’re not accountants, but we still need to isolate these effects. Otherwise, we risk baking FX uncertainty into our price changes and misreading the story. By pulling FX out, we can see the true drivers of revenue more clearly.

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