How strong is your Dollar?

Stocks slumped yesterday as investors worried about the weakened and weakening US economy. Earnings are under a fine microscope, rightly so, and investors are not thrilled with the results.

A tale of two currencies. We don’t often discuss currencies, do we? That doesn’t mean that they are not important, because they are… in so many ways. If you own stocks in companies that sell their goods in foreign countries, you know that when the US Dollar is strong, those goods are more costly to the locals, and you therefore expect demand to be weakened. Further, a strong dollar means that when your investment company wants to repatriate its earnings, a strengthening dollar means that proceeds from its sales may be worth less at the end of the day. Similarly, if your investment company purchases materials from abroad, a strong dollar means lower costs. This is somewhat oversimplified, but it does provide a fair representation of the impacts that a strong US Dollar may have on our stock investments.

I am sure that you have heard that the dollar has recently come off its highs, but it is still quite strong relative to prior years. First of all, what is it that caused the Dollar to spike so high last year? It comes down to two things. The first, is flight to quality. In an unsteady global economy, investors will, naturally, seek to invest in the most stable local economy. In this case, the US is usually the best candidate. Buying local sovereign debt - AKA Treasury Bills/Notes/Bonds – requires foreign investors to convert their funds into US Dollars. In essence, they must buy US Dollars, and the increased demand drives the price of those dollars higher… relative to the currency being sold. This is a strengthening dollar. Using the same concept of buying dollars, I am sure that you have seen how high Treasury yields have gotten. Those juicy yields also attract foreign investors… who must also convert to US Dollars to make investments. Yields on US Treasuries jumped faster than its trading partners due to the Fed which has been more aggressive than other central banks. A side note on that – foreign central banks are forced to keep up with the US to prevent their currencies from growing too weak. So, 2022 was the year of a rapidly strengthening US Dollar.

We discussed the implications of the strong Dollar on stocks, but there are other implications as well. I am sure that you may have heard the important commodities like Gold and Crude Oil are traded in US Dollars. If you did, that was correct. If you lived in Azerbaijan and you wanted to buy a barrel of locally produced crude oil in the port of Baku, you would have to first convert your Azerbaijani Manat to US Dollars. Crazy, but generally, true. The implications of the US Dollar being the transaction currency means that when the US Dollar is strong, things like Crude Oil and Gold become more expensive to non-US purchasers. If you open today’s attached daily chart book and consult chart number 12 (Dollar Index), you will see how the dollar spiked in late 2022 but fell rather precipitously into the close of the year. That coincided with the rising expectations that the Fed would end its hiking and start its cutting thereafter. Now, of course, there are many other factors that go into the pricing of Crude Oil, namely supply and demand, but the weakening Dollar, which made Crude technically cheaper to foreigners, certainly helped crude oil prices rise above $80 / barrel in recent weeks, though the principal driver was more likely OPEC+ supply cuts. You can check out chart 10 (West Texas Intermediate Crude Oil) to see crude oil pierce through a key resistance level which coincides with the Dollar’s decline. Though it has slipped below $80 in recent sessions, more likely it is due to expectations of weaker demand due to deteriorating economic conditions. If you jump over to chart number 11 (Gold Futures), you will see a more pronounced increase in Gold prices which coincides with the decrease in the US Dollar.

The impact of currencies on just about everything is far greater than many investors would suspect. While the Dollar has recently receded, it is still richer than it has been since the early aughts. While an additional +25 basis-point hike seems probable in the offing, Fed language in the past few days seems like it is pointing to a “one and done” scenario. If that is the case, or even a more extreme case in which the Fed begins cutting rates later in the year, then it is possible that we may witness further declines in the Dollar. Good for some, but not others. Know which camp you are in and pay attention.

WHAT’S SHAKIN’ THIS MORNIN’

This morning, the most active stocks by volume include Tesla (TSLA), Amazon.com (AMZN), and AT&T (T). Why are they shakin’? Overnight, Tesla announced that it is raising the prices of its higher-end models S and X. This is in sharp contrast to its announcement of price cuts just yesterday which caused its stock decline by -9.75%. Perhaps they rethought the strategy. This morning’s news has attracted buyers and the stock is higher by +0.87% in the premarket on high volume.

Amazon announced, WHILE YOU SLEPT, that it was preparing to lay off workers in the corporate area of its Whole Foods division. I can come up with all sorts of funny quips about that (you all know I love to shop at Whole Foods), but a leaner, meaner company these days is viewed positively by the markets, and that is probably why the stock is trading higher by +0.47% in the premarket.

Finally, we come to AT&T, whose stock got slammed by -10.41% yesterday. It is the stock’s biggest daily loss since Y2K, and it fell on the company’s huge cash flow miss combined with a decline in subscribers. The cash flow problem is a big one because it puts in jeopardy the company’s lavish dividend which is the primary reason many shareholders hold the stock. I highlighted AT&T in yesterday's Shakin’ section. This morning, the stock is higher by +0.57% on high volume in the premarket. No news to point to but investors like to buy things that are on sale, and AT&T is definitely on sale. Caveat emptor: that doesn’t mean it won’t get cheaper, so approach cautiously.

YESTERDAY’S MARKETS

Stocks traded lower yesterday as lackluster economic numbers and earnings cast a shadow on trade while Fed officials lined up to spew hawk talk throughout the session. The S&P500 fell by -0.60%, the Dow Jones Industrial Average declined by -0.30%, the Nasdaq Composite Index dropped by -0.80%, and the Russell 2000 Index traded lower by -0.54%. Bonds gained and 10-year Treasury Note yields slipped by -5 basis points to 3.53%. Cryptos fell by -3.75% and Bitcoin lost -3.57%.

NEXT UP

• S&P Global Manufacturing PMI (April flash) may have slipped to 49.0 from 49.2.
• S&P Global Services PMI (April flash) is expected to have declined to 51.5 from 52.6.
• Fed speaker schedule: Fed Governor Lisa Cook.
• Next week: Lots of earnings along with housing numbers, regional Fed reports, Consumer Confidence, Durable Goods Orders, GDP, PCE Deflator, and University of Michigan Sentiment. Check back in on Monday for calendars and details.