Saturday, March 14, 2015

How should you trade the strengthening dollar?


ZeroHedge critique's Goldman's advice to buy US stocks with big domestic sales:
...the only issue with that is that it bets the farm on a US consumer who, as the past three months of plunging retail sales and contracting consumer (and mostly credit card debt), and surging savings rate have shown, is once again fully tapped out.

7 comments:

  1. I cannot say that I watch the market as I once had, but it continues to interest me. The fact that someone can go on a television in New York, that is seen in Europe or Japan, and make a statement the effects the euro but not the yen – talk about power. The question is who has the power. The recent news about a second day of the dollar dropping or the euro rising (USD/EUR) and the yen is unchanged (USD/JPY) (Chavez-Dreyfuss, G., 2014), may help. I would say that the calm level headed traders outside of Europe have the power. Financial plans are always changing, but the investor who develops a plan with some strategy, and sticks to it (maybe adjusting often, but sticking to the plan) is the investor that is ready for small changes, and sees little volatility.

    Take for example the Federal Reserve increasing the benchmark interest rate. This has been at historical lows for years; a single word used to hint that the rate is on the move can send some investors into a tailspin, or rocket (depending on what side of the trade you are on). Will it be this week, next month, now July because first quarter numbers are week? We don’t know but maybe our plans need to have the word soon in it – soon, as in not this week, but before we finish this class – or the program.


    Chavez-Dreyfuss, G.,(2014, March 17) U.S. dollar down again on weak data, investors await Fed retrieved from: http://www.reuters.com/article/2015/03/17/us-markets-forex-idUSKBN0MD0U720150317

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  2. It's been about 12 years since the USD has reached near parity with the Euro. As the United States prepares to raise borrowing rates that have been near zero, the ECB is entering the first phase of a quantitative easing program that will inject over $600 billion of newly printed Euros and has driven borrowing rates, in some countries, into negative territory. Imagine going to a bank, taking out a mortgage, and they pay you interest because they have too much money on hand to lend out. Sounds great for those who have established businesses in Europe, pay suppliers in Euros, and sell in USD. Unfortunately though this isn't the common case.

    In The Wall Street Journal yesterday, Saabira Chaudhuri wrote an article about how many European designers and retailers are facing higher costs due to a supply chain that relies heavily on Chinese manufacturing. (Chaudhuri, 2015) Firms such as H&M (second largest clothing retailer in the world) rely on Chinese factories to produce their clothing. Chinese factories charge in USD while a large portion of H&M's sales are derived from Euros. By having a strengthened USD and weak Euro, many European businesses are seeing the cost of doing business rise and profit margins shrink.

    Chairwoman Yellen caused quite a stir the other day when she removed the word "soon" from her economic outlook pertaining to the raising of interest rates. The market showed it's displeasure of the news by tanking the USD and strengthening the Euro. Fortunately, the losses have been regained. In my personal opinion I commend Yellen for not adhering to a set date and agree with her decision to take everything one step at a time. Yes the announcement caused volatility, that's what it was supposed to do. Remember last year when for a month the market saw little to no volatility and traders bemoaned the market? Volatility is a necessity in the world of finance. It's needed to create the ebbs and flows of free market capitalism. When thinking about Yellen's decision to not announce a set date, the first thing that comes to mind is a game of football. Any coach worth their paycheck will never go in to a pre-game meeting, hand the players a pamphlet, and say "here you go, these are the plays that will be called from the first snap until the last down. No deviations." In doing this the coach shows that they lack the foresight to predict unexpected changes in the game. It would show an inability to adapt. That is exactly what it would be like if Yellen gave a set date. She nor anyone else at the Fed can predict what exactly will happen within the next 6 or 7 months. If something goes awry and the date needs to get changed, the market will see Yellen and the Fed as lacking credibility. It's a hard thing to do but we must wait and ensure that the US economy is healthy enough to withstand higher rates.

    Chaudhuri, S. (2015, March 24). The Wall Street Journal. Europe's Fashion Retailers Under Pressure From Strengthening Dollar. Retrieved from: http://www.wsj.com/articles/europes-fashion-retailers-under-pressure-from-strengthening-dollar-1427211363?KEYWORDS=retail+dollar

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  3. Eventually inflation will be much higher as US workers buy more due to the strength of the United States dollar and their consumer purchasing power causing a depleting effect on U.S. domestic inventories. In addition, higher greenbacks in the long-term will influence U.S. manufacturers to move some or all manufacturing production back overseas or south into NAFTA. A top of these two economic factors, less foreign vacationers (future bookings) into he United States can dramatically drop because of the weaken foreign exchange values for those coming from Asia and Europe.
    Bank interest rate returns are not offsetting consumer spending or increasing stability into the banking system, instead the Federal Reserve policies continues to artificially increase the money supply which is allowing bubble type stock market conditions while U.S. obligations and consumer credit are still at all-time highs. Yes, we see the short-term increase in economic performance but the underlying factors will cause a declining economic storm in the long-term unless the Federal Reserve starts to step back, closes the discount window and allow market forces and consumers to create real assets and valuations.

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  4. A strengthening dollar is something that most of us have hoped for and we should welcome the feeling of the U.S. dollar rising in value compared to other currencies. I mean, who would not want a U.S. dollar that buys more of another currency than it did before?
    Apparently, this is an issue. As the dollar has strengthened, investors have worried about the likelihood of the first increase in interest rates in nine years and a plunge in the value of the euro. The effects of the strengthening dollar, however, are even more far reaching than that! According to the New York Times, because of these worries, stocks took a hard fall on 3/10/15. The effect of this fall wiped out any gains for the Dow Jones industrial average and the Standard & Poor’s 500-stock index realized in 2015 up to that point.
    The threat of increasing interest rates makes potential investors a bit shy. Since 2008, the government has made money available to corporations at modest interest rates in order to drive business – this is appealing to investors, who seek out growth in the corporations in which they invest. With an increase in rates, the investors are less likely to want to invest for fear that the growth will not be as profitable.
    Finally, the New York Times goes on to point out that a strengthening dollar can hurt American companies by making their goods costlier for foreigners and shrinking the value of profits the companies make overseas. A strong currency is a good thing to have. A strengthening US dollar against other international currencies in an economy where the US government is threatening to raise interest rates is quite another story – a story whose ending is yet to be written.
    References:
    http://www.nytimes.com/2015/03/11/business/daily-stock-market-activity.html?_r=0

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  5. In today’s economy we have seen both rising and falling dollar, this can influence and change various groups in the economy differently. In reference to trading with a rising dollar we can make our imported products cheaper to our customers and make our exported products more expensive to the foreign buyers. Thus, this can be interpreted as, imported products are good for the consumers using the imports and not so good for the exporters selling the products. So even if it turns out to be a net positive or a net negative, it all depends on the state of that economy.

    If it turns out to be a net negative, it would mean that the economy has a lot of slack in it with low capacity utilization and a high employment. The trade effects, under these circumstances would not help the economy in any way to come out of recession and may even make recession worse. On the other hand, with a more stable and fully employed economy, the rising dollar will act as a headwind in that it will reduces the total effective demand. Looking at the full and extensive micro perspective, a stronger dollar can benefits the domestic population by improving their terms of trade with the outside world.


    Reference:
    1. Frobe, McCann, Ward and Shor. (2014) Managerial Economics – A Problem Solving Approach.

    2. McTeer, Bob. (2014) Forbes - Is Strong Dollar a Good Thing or a Bad Thing

    ReplyDelete
  6. In today’s economy we have seen both rising and falling dollar, this can influence and change various groups in the economy differently. In reference to trading with a rising dollar we can make our imported products cheaper to our customers and make our exported products more expensive to the foreign buyers. Thus, this can be interpreted as, imported products are good for the consumers using the imports and not so good for the exporters selling the products. So even if it turns out to be a net positive or a net negative, it all depends on the state of that economy.

    If it turns out to be a net negative, it would mean that the economy has a lot of slack in it with low capacity utilization and a high employment. The trade effects, under these circumstances would not help the economy in any way to come out of recession and may even make recession worse. On the other hand, with a more stable and fully employed economy, the rising dollar will act as a headwind in that it will reduces the total effective demand. Looking at the full and extensive micro perspective, a stronger dollar can benefits the domestic population by improving their terms of trade with the outside world.


    Reference:
    1. Frobe, McCann, Ward and Shor. (2014) Managerial Economics – A Problem Solving Approach.

    2. McTeer, Bob. (2014) Forbes - Is Strong Dollar a Good Thing or a Bad Thing

    ReplyDelete
  7. I can’t tell any perfect way, but what I do is simply follow the advice that I get from my broker OctaFX, it’s one of the finest companies that has achieved everything that other brokers struggle to do with 11 awards in just 4 years, it’s just sensational broker to be working with due to their news and analysis facility, I can follow it daily and by that I take my decision whether to do buy or sell and mostly it’s perfect!

    ReplyDelete