Advertisement
Canada markets closed
  • S&P/TSX

    22,167.03
    +59.95 (+0.27%)
     
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • DOW

    39,807.37
    +47.29 (+0.12%)
     
  • CAD/USD

    0.7384
    -0.0002 (-0.03%)
     
  • CRUDE OIL

    83.11
    -0.06 (-0.07%)
     
  • Bitcoin CAD

    95,340.94
    -484.99 (-0.51%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • GOLD FUTURES

    2,254.80
    +16.40 (+0.73%)
     
  • RUSSELL 2000

    2,124.55
    +10.20 (+0.48%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • NASDAQ

    16,379.46
    -20.06 (-0.12%)
     
  • VOLATILITY

    13.01
    0.00 (0.00%)
     
  • FTSE

    7,952.62
    +20.64 (+0.26%)
     
  • NIKKEI 225

    40,369.44
    +201.37 (+0.50%)
     
  • CAD/EUR

    0.6836
    -0.0007 (-0.10%)
     

Why the US dollar is public enemy #1

By David Nelson, CFA

A myriad of factors seem to be colliding, forcing some of the world’s top strategists to the sidelines. The approaching election, a confused Fed and stretched valuations weigh on sentiment, as the markets here continue to churn, forcing investors to bounce from one sector to the next searching for the Holy Grail.

The US dollar is the single biggest headwind for stock prices and hence “Public Enemy #1.” Whether it’s the prospect of a year-end Fed hike or the relative weakness of other currencies, the spot rate is approaching the highest levels of the year, which poses a significant threat to US multinationals. The revenue translation cuts right to the bottom line as it becomes increasingly difficult to compete with overseas counterparts.

US dollar - 5 years
US dollar - 5 years

In addition, the longer term picture shows that the dollar’s rapid ascent threatens to take out a significant double top—implying even higher prices as the year unfolds.

Euro - 5 years
Euro - 5 years

Even more important than the prospect of a rate hike is the secular decline of the euro. Yes quantitative easing is big factor in euro weakness, but I think the chart above speaks to bigger problems ahead for the currency—and maybe the European Union itself. Brexit may prove to be just a shot across the bow that could trigger other exits down the road.

ADVERTISEMENT

While my prediction on Bloomberg TV in 2011 that the euro would eventually fail within 5 years isn’t going to pan out this year, I’m confident in my thesis and stand by my statement, “You can’t have a common currency without a common government!”

Oil

One asset class thriving in face of a rising dollar is WTI crude oil. Typically, a strong dollar acts as a headwind for the commodity, but crude has broken out to a new 52-week high. Over the weekend, Gulf oil ministers were meeting in Riyadh along with Russian counterparts to discuss production cuts that would likely take effect in November. Both OPEC and Russia are coming off record output, so it begs the question just how much are they willing to cut and, more importantly, can they control the cheating.

As a reminder, Saudi Arabia abandoned its role as swing producer back in 2014, forcing crude into a near two-year slide as it looked to wipe out the US shale complex. In what today looks like a failure, it seems all parties have come back to the table. Recent history isn’t on their side, as widespread cheating has become the norm, and all parties need as much cash flow as they can generate to maintain budgets. Already, Iraq Oil Minister Al-Luaibi, speaking from Baghdad, has asked that Iraq be given an exemption from any production cuts

If crude is going to maintain recent gains, I believe it will come from increased economic activity and not from OPEC trying to relive its days as a thriving cartel. Each dollar that crude oil rises brings more US production back online.