💪🇺🇸 Strong USD: What It Means For You
Happy Hump Day everyone,
Hope you had a good week so far. Markets have had an up week but are still recovering from big losses. You’ll catch me continuing to DCA into the market! Not investment advice.
We have some exciting new content coming out on the YouTube channel in the next few weeks so keep an eye out for that! Turn on post notifications for the channel to never miss a new video!
Enjoy this week’s Hump Days!
- Humphrey, Rickie & Tim
Featured Story
Asset classes across the board have been getting hit hard, yielding miserable returns in 2022; nearly every asset class, except for the United States dollar. In an economic environment where we are seeing the British Pound and the Euro plunging to record lows, how come the U.S. dollar performing so exceptionally well?
In the last few months, we’ve seen the Euro reach parity with the U.S. dollar for the first time in nearly two decades (we wrote about this in an old Hump Days). More recently, we saw the British Pound fall sharply just last week, marking a 22% decline from 6 months before. Experts say the pound declined because investors are wary of British Prime Minister Liz Truss’s proposal to increase government borrowing to pay for tax cuts. A move that she claims will generate more economic activity and, in turn, higher tax revenue. However, some investors say the plan will lead to a higher budget deficit and increase inflation which has already reached a 40-year peak.
As for the U.S. dollar, why are we seeing it strengthen so much? Aren’t we in the middle of a recession? We must note that it is notoriously difficult to attribute any single cause for the change in the value of one currency in comparison to another. A basic explanation would include the fact that the Federal Reserve is expected to increase interest rates faster than other major countries which make the dollar more attractive to investors since it means they can expect a bigger return. The Russian invasion of Ukraine also plays a part (of course) because it made European energy prices skyrocket, making the U.S. economy look healthier in comparison. The dollar is currently a “safe haven” for many investors who have flocked to the dollar to buy safer assets like U.S. treasury bonds, as the world economic outlook worsens.
While one might believe that a strong U.S. dollar would be a good thing for Americans, it comes as a double-edged sword, making things difficult for many multinational corporations. It makes the overseas goods of U.S. corporations less attractive as they get comparatively more expensive (in their local currency) which dents exports. On the other hand, American companies abroad benefit from a relatively weaker local currency. Essentially every multinational CEO has the nightmare of foreign exchange in the back of their mind at the strength of the dollar right now. For example, Salesforce expects foreign-exchange headwinds to decrease sales by $800M, previously expecting a $600M hit.
Lastly, what does this all mean for you? For Americans, a stronger dollar helps curb inflation by making imports cheaper as foreign sellers are more inclined to drop prices when the dollar becomes more valuable. Although, experts say the strength of the dollar could shave off 0.2% - 0.3% off overall inflation, a small amount compared to the 8% - 9% inflation we’ve been accustomed to seeing. American travelers will also find that they can get more for their money in other countries.
For international readers, a strong dollar can be very harmful, especially to those in developing and emerging economies. Countries that borrow heavily in dollars could suffer because it becomes harder to make repayments as the dollar rises and their own currencies depreciate. Sri Lanka's economy, for example, has found itself in a situation as it deals with a mountain of debt and not enough USD to pay for imports of essential goods.
All eyes will be on the Fed as they continue to make decisions on how aggressively they will tackle inflation. If inflation stays high and the Fed has to keep raising rates, the USD could continue to rise. We are in a very uncertain environment, however, and the exchange rate going forward will be hard to predict.
Weekly News Roundup
Credit Suisse to Remain “Under Pressure” but Analysts Wary of Lehman Comparison (CNBC)
Shares in Swiss bank Credit Suisse continue to recover after hitting an all-time low of $3.64 (down 53% YTD) on news that their credit default swaps (CDS) hit a record high at a spread of more than 300bps, well above the rest of the sector. CDS are a kind of derivative that serves as an insurance contract against a company defaulting on its debt. All three major credit rating agencies now have a negative outlook on Credit Suisse. Experts dismiss the comparisons to the Lehman collapse, saying that Lehman had serious issues with their balance sheet in the run-up to the 2008 crisis.
TC: There’s been a lot of fear mongering about Credit Suisse on Twitter recently. Chart below shows the investment bank 5Y CDS from 2007 to present. That white line is the 5Y CDS for Credit Suisse. Even though the CDS is elevated, it’s still nowhere near the 2008 highs.
OPEC+ to Consider Oil Cut of Over 1M Barrels per Day (Reuters)
OPEC+ will consider an output cut of more than 1M barrels per day next week in what would be the biggest move yet since the COVID-19 pandemic to address oil market weakness. A significant production cut is poised to anger the U.S., which has been putting pressure on Saudi Arabia to increase supply and help soften oil prices while also reducing revenues for Russia as the West seeks to punish Moscow for invading Ukraine. OPEC+ will meet in Vienna for the first time since March 2020.
TC: With oil demand coming down, an output cut could rebalance the oil market and drive prices back up.
RH: Y’all should’ve bought an oil tanker when the price was negative back in April 2020.
Eurozone Inflation Hits Record 10% Amid Energy Crunch (WSJ)
The eurozone’s annual rate of inflation hit double digits in September as uncertainty about their ability to make it through the winter without power cuts continued to keep energy prices elevated. The recorded inflation of 10% is the highest rate since records began in 1997. The acceleration in the inflation rate is likely to prompt the European Central Bank to raise its interest rate again next month, threatening to push the economy into contraction.
Chart of the Week
As of 2021, the average battery-powered EV could travel 217 miles (349 km) on a single charge, a 44% increase from 151 miles (243 km) in 2017 and a 152% increase relative to a decade ago.
Despite the steady growth, EVs still fall short when compared to gas-powered cars. In 2021, the median gas car range (on one full tank) in the U.S. was around 413 miles (664 km)—nearly double what the average EV would cover.
Source: Visual Capitalist