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Posts Tagged ‘USD’

CFA learnings applied – The Dollar’s Impact on Stocks So Far in 2011

March 7, 2011 Leave a comment

Bespoke has a nice post on the impact of US Dollar’s depreciation on earnings of US companies… this is a very simple yet very applied example of the CFA Level 2 reading on Multinational Operations.

The US dollar index (trade weighted measure against other currencies) is down about 3% in 2011. How does this affect earnings of US companies? US companies can be broadly classified in to two categories: those that do 100% of business is in US and in USD and those that do a significant share of their business globally… it is the second category of companies that are most affected by currency fluctuation…

Source: Bespoke Investment Group

How does USD depreciation affect stocks?

When the dollar is rising, US companies that do most or all of their business within our borders stand to benefit, while US companies with large amounts of revenues outside of the country lose out. The opposite occurs when the dollar is declining — companies with large amounts of international revenues benefit at the expense of the domestics.

If the above is not intuitive, visit my earlier post here.

As shown in the second chart below, the average YTD performance of stocks in the decile with the largest percentage of international revenues is 7.68%, which is by far the best performing decile. The average YTD performance for stocks with no international revenues is 3.09%. This performance is inline with what one would expect given the dollar’s decline.

Loosely speaking, about 3-4% of the 7.68% rise in the top performing decile can be attributed to currency depreciation and the rest to the general market rise…

Going forward, if you expect the dollar to continue its decline, the stocks with large amounts of international revenues should continue to outperform. If you expect the dollar to reverse course and head higher, the stocks with little or no international revenues should start to pick up.

Source: Bespoke Investment Group

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Technical action in Gold does not look good

January 25, 2011 Leave a comment

Gold has declined $100 or 7% at pixel time from its recent all-time high… even when the US Dollar is declining (correlation trade broken?)! I think it is primarily due to rising growth forecast for the global economy (read US economy).

Technically, the charts speaks for itself:

· Medium term trend seems intact on the 1-Year chart

· We are near strong support area at $1325

The 3-year chart, however is more interesting… gold is hanging to dear life with these support points:

· Green long-term trend line

· Green support line

· 100 day moving average

If the long-term trend line is successfully breached, then I think we will test 61.8% Fibonacci retracement of the rise from $700-1425 at about $1150

Economics 101 aside, commodities as a store of value will only go higher in the long-term (> 5yrs) because the only solution to massive public and private sector debts is inflation.

Technical Analysis update – USD & S&P 500

October 5, 2010 Leave a comment

A quick update on the technical picture, highlighting major support and resistance levels.

Currencies are grabbing headlines these days thanks to constant tug-of-war in the race to the bottom. Japan announced quantitative easing today. Last week, the US Fed signalled another round of QE and Bank of England has maintained its QE stance.

With that, here is a technical picture of the US Dollar… the rather ominous death cross on the USD doesn’t bode well for its trading partners and is probably in anticipation of QE2 measures leading to downward dollar spiral.

The recent US dollar sell-off was rather quite fast and the chart now signals a recovery from the oversold conditions…The recent sell-off in USD is good news for equity markets… S&P 500 is breaking above the 1150 mark today… finally, after trying everyday for the last 7 trading sessions.

The 50 day SMA is trending upwards and could cross the 200 SMA before the end of 2010 giving the all clear Golden cross.

One caveat is that the September rally wasn’t accompanied with increase in volume but then again the average volume relative to prior years has been low in 2010.

Battle of the Charts

September 14, 2010 Leave a comment

A quick update on market charts… given the recent correlation it is not surprising to notice that major markets are either at key support or resistance levels… here is a summary of the major markets 

(Note: Red arrow indicates resistance & Green support) 

S&P 500 – can it hold the 200 day moving average? 

 

   

CRB – Commodites Index – 6 month high… Nearing Golden Cross (50 day moving average crossing the 200 day moving average from below)? 

 

USD Dollar – will it hold the 200 day support? It did in early August but it is also closer to the Death Cross (converse of Golden cross) 

  

 

 

   

TSX – 125 points shy of the 52-week high, RSI approaching 70 and imminent golden cross signal 

  

 

 

Fear – doesn’t matter how hard the double-dip camp tries, VIX hasn’t broken the downtrend line from mid-May but it is also resting at key support level of 20 

  

 

 

I’m curious to see which side wins…I’m still biased to the downside given the fundamental picture.

Wheat, CRB, fertilizer stocks, USD, 200 day moving average & chart porn

August 5, 2010 Leave a comment

If you haven’t heard:

Wheat prices are at a 2-year high… up 50+% in July alone!… which has undoubtedly taken fertilizer stocks (POT, AGU, MOS, etc) higher by ~25%

Source: stockcharts.com

CRB – the ubiquitous commodities barometer is at a 7-month high – battling strong resistance

Source: stockcharts.com

Baltic Dry Index has turned up 10%

VIX is below the 200 day moving average

Source: stockcharts.com

S&P 500 is trying to hang on to crucial support at 200 day moving average…

Source: stockcharts.com

US Dollar index is barely hanging in at the 200 day moving average

Source: stockcharts.com

Oh and lastly… the Shanghai stock market as a leading indicator of leading indicators… what a joke!

What does this all mean? The next days/weeks are crucial to get a sense of market direction… i think markets are at an inflection point and could either way from here… tighten your belts!

Short term uptrend in Gold broken, Correlation to USD & more

July 31, 2010 4 comments

The 1-year uptrend channel (blue lines) is violated… The recent new (nominal) high did not make a new high in RSI or MACD…(negative divergence for the technically inclined & the dotted red lines on the chart) means the recent high was made on declining momentum – not a good sign.

I have drawn out the various support levels from here down and my short term (< 1 year) bias is to the downside especially for August… Demand is slow during the summer months because most jewelery manufacturers are shut down and don’t reopen till September…

Gold chart with technical analysis

Source:stockcharts.com

US Dollar & Gold Correlation

In theory, a commodity priced in USD dollars will move inversely to the value of USD e.g.- if Gold goes up in USD, then the value of USD in other currencies goes down and vice versa. Among all commodities, Gold particularly exhibits a strong negative correlation in a “normal” volatility year… during highly volatile or uncertain economic periods, this correlation deviates significantly from the norm…

Lately Gold & USD have been moving in lock-step… i.e. positively correlated as illustrated in this nice chart from Bespoke Investment Group

Chart showing correlation of Gold & USD

Source: Bespoke Investment Group

Eventually the correlation has to revert to its mean… which would mean that USD & Gold move in opposite directions. Couple weeks ago I posted a chart of the US Dollar Index positing that USD will reverse the downtrend and rally… hasn’t happened yet but I still think the USD is at a key support level and will rally from here and expect Gold to continue the downtrend…

Also, Gold has risen 21% from 1044 in Feb 2010 to its intraday high of 1265 in June 2010 without a 10% correction… of course it can go higher without correcting but the subsequent correction will be just as severe…

Lastly… Inflation

Historically, Gold is also meant to be a hedge against inflation… if you have been reading the news lately, you know well that prices are declining not rising so I believe the argument of buying Gold right now as a hedge against inflation is bogus!

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Update: Gold during Deflation via ZeroHedge

According to Casey Reseach

There’s lots of data about what gold does during periods of high inflation, but less so with deflation, partly because we don’t see a true deflation all that often. But of course we’ve got the biggie we can look at, and the seriousness of the Great Depression can give us a big clue as to how gold stocks behave in a true deflationary environment

This chart from the above post is quite interesting:

Source: zerohedge.com

From 1929 until January 1933, the stock of Homestake Mining, the largest gold producer in the U.S., rose 474%. Dome Mines, the largest Canadian producer, advanced 558%. In spite of the gold price being fixed at the time, gold stocks rose dramatically.

At the same time, the DJIA lost 73% of its value

The bottom line is that the two largest gold producers – during a time of soup lines and falling standards of living – handed investors five and six times their money in four years.

What about gold itself? On April 5, 1933, President Roosevelt issued an executive order forcing delivery (i.e., confiscation) of gold owned by private citizens to the government in exchange for compensation at the fixed price of $20.67/oz (you can read the original order here). And less than nine months later, he raised the gold price to $35, effectively diluting every dollar 41% overnight and swindling everyone who had turned in his gold.We don’t know exactly what an untethered gold price would have done during the depression, but given its distinction in history as a store of value, we believe it would retain its purchasing power in a deflationary setting regardless of its nominal price. In other words, while the price of gold might not rise, or could even fall, your best protection is still gold.

 

 This is the only quasi-convincing article I have seen on owning Gold in deflation. A lot of well-respected economists (David Rosenberg, Roubini, etc) and financial bloggers (Mish) are urging investors to own gold during deflation but without an objective reasoning… Perhaps that is as noted above due to the lack of true deflation in a fiat monetary system.

USD index due for reversal

July 21, 2010 1 comment

The US Dollar Index is due for a reversal of the downtrend from its 52-week high in June 2010 on a backdrop of technical and fundamental factors…

Technically, the chart says it all…

Technical Analysis of US Dollar Index - 21 July 2010

Source:stockcharts.com

US equity market charts have broken down … US equities indices are inversely correlated to the US Dollar… hence a weakness in equities will push the US Dollar higher…

Fundamentally…

  • weakness in Euro area due to the omnious soverign debt crisis
  • downgrades of sovereign debt and Euro area bank debts
  • earnings of US companies have been sub-par to say the least with mostly lower guidance for coming year…