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Friday, July 15, 2022
The yen (JPY=X) is down 20% versus the dollar over the last year — nearly unheard of in the modern era.
Bitcoin (BTC-USD) has crashed 70% against the dollar since its November record high — not unheard of, but painful.
Some of this might be great for Americans shopping or traveling abroad, but these moves are wreaking havoc on global markets and leaving many investors scratching their heads.
After all, the Fed “printed” $9 trillion by buying Treasury bonds, which might sound like a massive devaluation of the greenback. And now the dollar is soaring as traditional inflation hedges like gold are getting crushed.
So: what gives?
There are two key factors at work.
First, interest rates are surging in the U.S. as the Federal Reserve moves to tamp down 40-year highs in inflation. And if global investors want to get paid the relatively higher interest rates here, they sell their local currency, buy dollars, invest in U.S. bonds, and pocket the difference. There are hedging costs in this so-called “carry trade,” but it’s fairly simple in theory and a hedge fund favorite.
Second, foreign investors in weak economies are buying the greenback for its relative safety. Inflation at home is soaring and the political situation in the U.S. is messy at the very least, but there are so far no worries among investors the U.S. government will fail to meet its financial obligations.
Taken together, these haven flows in combination with large interest rate differentials have led to investors bidding up the dollar at an uncomfortable rate.
And much like the surge in interest rates, the huge moves in the dollar currency crosses are wreaking havoc for global investors.
Trades in the normally-quiet U.S. Treasury and dollar foreign exchange markets are highly levered.
Investors in these markets are often seeking to eke out a few basis points — or hundredths of a percent — from a given move. To make these bets, they employ massive leverage to magnify the small gains.
This year, bets across these markets have been unwinding — oftentimes chaotically — spilling over into the plain vanilla stock market.
And canvassing the reaction in corporate America, the dollar is wreaking havoc in the C-suite.
According to FactSet, 40% of the total revenue of S&P 500 companies is from abroad, with the tech and materials sectors deriving over 50% of their sales outside the U.S.
One positive to come out of the soaring dollar has been a reversal in the recent bubble in commodities, which has started weighing on oil, gas, and grain prices. Lower input prices are great for companies and eventually consumers, but it’s the volatility that’s the real killer.
If you were an airline earlier this year trying to hedge your fuel costs when WTI crude oil (CL=F) was trading in the $120/barrel range — you probably just wasted a lot of money given the price is now in the mid-nineties.
So as we head into earnings season, we’ll look for more clarity on the fallout from the latest currency moves — and what executives see in the coming quarters. Analysts will then get to work and revise their own expectations — expectations that are still extremely lofty by historical standards.
And as we’ve all learned this year, bad news gets priced in rapidly.
What to Watch Today
8:30 a.m. ET: Empire Manufacturing, July (-2.0 expected, -1.2 during prior month),
8:30 a.m. ET: Retail Sales Advance, month-over-month, June (0.9% expected, 0.3% during prior month)
8:30 a.m. ET: Retail Sales excluding autos, month-over-month, June (0.7% expected, 0.5% during prior month)
8:30 a.m. ET: Retail Sales excluding autos and gas, month-over-month, June (0.1% expected, 0.1% during prior month)
8:30 a.m. ET: Retail Sales Control Group, June (0.3% expected, 0.0% during prior month)
8:30 a.m. ET: Import Price Index, month-over-month, June (0.7% expected, 0.6% during prior month)
8:30 a.m. ET: Import Price Index excluding Petroleum, month-over-month, June (0.2% expected, -0.1% during prior month)
8:30 a.m. ET: Import Price Index, year-over-year, June (11.4% expected, 11.7% during prior month)
8:30 a.m. ET: Export Price Index, month-over-month, June (1.2% expected, 2.8% during prior month)
8:30 a.m. ET: Export Price Index, year-over-year, June (19.9% expected, 18.97% during prior month)
9:00 a.m. ET: Bloomberg July United States Economic Survey
9:15 a.m. ET: Industrial Production, month-over-month, June (0.1% expected, 0.2% during prior month, downwardly…