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Volume 11, Edition 22 | July 18 - July 22, 2022

A High-Flying Currency to Watch

Doug Walters, CFA
There is a new hot currency everyone is talking about – the US dollar. Investors can take advantage of these currency moves.

Contributed by Doug Walters, Max Berkovich, David Lemire, Eh Ka Paw

Cryptocurrencies may be struggling, but another currency is booming – the US dollar. Over the last year, the dollar has strengthened against most major currencies, reaching levels not seen in decades. There are opportunities for investors (and travelers).

Over the past year, the value of the dollar versus the Japanese Yen, Euro, and British Pound has increased sharply, thanks to aggressive rate moves by The Fed.

  • Your dollars will buy you about 15% more in Euros and Pounds. The greenback even broke parity with the Euro (i.e., $1 was worth more than 1 Euro) for the first time in twenty years.
  • The move versus the Yen has been even more dramatic, increasing by 24%.

So what should investors be doing in response? Let’s start with what you should not do – day trade foreign exchange. Currencies are very volatile, and trading them is a recipe for disaster for the average investor. Instead, investors should ensure they have a healthy dose of foreign exchange exposure in their portfolios courtesy of developed international and emerging market securities. These holdings are an essential part of a well-diversified portfolio, and their currency exposures are, in part, what makes them effective “diversifying” holdings. Regular opportunistic rebalancing provides the potential to capture the benefits of currency moves over time.

How else can you capture the benefits of the recent currency moves? Travel! Your dollars will buy you a lot more fish and chips in London and sushi in Tokyo than they did just six months ago. If you have contemplated a trip overseas, now is as good a time as ever.

Bon voyage!

15%

Increase in the Dollar versus the Euro

The US Dollar has increased in value versus the Euro by 15%, taking it to a level not seen in decades.

Headline of the Week

Investors are getting a little reprieve in this otherwise challenging year. US Stocks were up around 2.8% this week and are now up close to 5% on the month. Small Cap stocks have fared even better. On the economic front, we saw continued weakness in housing, which brings us our headline of the week.

Housing data was abundant this week, most of it in one direction.

  • Existing Home Sales fell month-on-month and were weaker than expected.
  • Mortgage Applications fell 6.3%.
  • Housing starts fell and were weaker than expected.
  • Unsurprisingly, given the above trends, Homebuilder Sentiment cratered, coming in way below consensus.

Higher rates are starting to be felt in the housing market. The MBA 30-Year Mortgage Rate index has risen from 3.3% at the start of the year to 5.8%. House prices have yet to fall under this pressure, but that would be the natural impact of waning demand.

The Week Ahead

July will end with a bang! A massive week of earnings will overshadow the Federal Reserve, 2nd Quarter Gross Domestic Product (GDP), and PCE inflation report.

Hike, Hike, Hike, (Hike)!

The market has priced in a 0.75% hike from the Federal Reserve on Wednesday, but is a 1% hike off the table?

  • Central Banks have been catching investors off guard and raising rates faster than expected. Chairman Powell may use that as cover to do the same.
  • With no rate meeting in August, would the central bank have the willpower to take a more significant whack at inflation?
  • This week’s economic data has not cleared a path to 1%.
  • Hesitancy from St. Louis Fed President Bullard and Governor Waller, two of the more hawkish committee members, keep the odds of a 1% hike minimal.

Two’ peat?

Two consecutive quarters of Gross Domestic Product contraction are required to hit a recession. We will get a preliminary second quarter number on Thursday.

  • After a 1.6% contraction in the first quarter, early expectations say a 0.9% expansion will be reported, and we will avoid the technical recession.
  • The Atlanta Federal Reserve’s GDPNow model is reading a negative number, so there is little market consensus on what to expect.

Deflated Expectations

The Fed’s preferred inflation gauge, the Personal Consumption Expenditure Index (PCE), is out Friday.

  • Economists are predicting a decline in the core number (which excludes food and energy).
  • The core number is predicted to be a 4.7% year-over-year increase, matching the previous month’s number.
  • However, the month-over-month change is expected to be 0.5%, a faster jump than in the previous report.
  • Chatter is saying that the PCE may no longer be the Fed’s preferred inflation gauge and that it has fallen back to the Consumer Price Index.

The Big Boys

The biggest public companies in the world are on deck to report 2nd quarter earnings next week.

  • So far, roughly 70% of companies that reported beat expectations.
  • Next week has Google’s parent Alphabet (GOOG, GOOGL), Facebook’s parent Meta Platforms (META), Microsoft (MSFT), Apple (AAPL), and Amazon (AMZN) reporting earnings.
  • Also, Visa (V), Mastercard (MA), Exxon (XOM), Chipotle (CMG), McDonald’s (MCD), Procter & Gamble (PG), and Coca-Cola (KO) are on the calendar, so expect to hear the words “strong dollar” a lot.

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