🧨A New Headwind is Appearing⛽️

💸USD strength gaining Traction💰

The US Dollars have been gaining strength, and often this does not bode well for the US market. Since the start of the year, we have taken a contrarian view of the US dollars- while a majority of the people had expected a weaker USD, we have called for a firmer dollar. The case of a weaker dollar was easy. The sizeable fiscal spending will require a large treasury volume, which will likely increase the money supply and thus weaken the USD.

Our Contrarian Take📻

However, this did not turn out to be true because the issuance of the treasury is relatively stable, and much of the pandemic stimulus set aside during the Trump era was not entirely spent. Moreover, a somewhat volatile political and economic environment encourages investors to park funds in a haven like the USD. Higher inflation also boosts the prospect of an interest rate hike, which promotes the dollar’s strength relative to other currencies. These factors have generally strengthened the USD.

📈USD and its impact on Equity🔍

Companies tend to use a stronger dollar as a reason for poorer performance. After all, S&P 500 companies generally derive 40% of their revenue from international markets, and their revenue tends to reduce in value when converted back in USD from other currencies. A small number of companies appear to have started speaking about the negative impact of a strong USD on their earnings in the future.

While the above reasons seem logical and compelling, Pika World believes that the reason could be one of convenience than in reality for the poor performance of corporate earnings. If we observe the current market condition, the strong USD had not dented the equity market. The S&P 500 return for the year thus far is around 24%, about three times its historical average.

🧮Expenses and Hedging🔒

A stronger dollar is not an absolute negative for companies. Indeed, on the revenue end, it might make the figure smaller. Still, on the expenses side, companies with a significant international presence also tend to have considerable operations paid in nondollar currencies. Hence, these expenses may also look smaller when converted in USD. Furthermore, many MNCs tend to hedge some level of currency exposures and may deter material impacts of currency fluctuation into their earnings.

As the earnings seasons continue, we may gain more insights from corporate leaders on their woes with a strong USD, and perhaps at times, we can take with a pinch of salt the prominent role of USD in affecting revenue.

We hope you enjoy this latest insight and have a restful evening.

Cheers,

Pika Nat.