Long U.S. dollars is my favorite theme for the rest of 2013. My favorite post of the year is my Macro Wrap that I wrote on May 15th, laying out my reasons for favoring the dollar.
In the past 2 weeks, the dollar has started to gain very quickly against emerging market currencies. The chart tour of 1 year daily charts of the U.S. dollar vs. emerging market currencies (with the 200 day moving average in black) illustrates that point. These charts below show USD vs. the other currency (so a higher chart is the U.S. dollar gaining value vs. the emerging market currency):
Brazilian Real:
Indian Rupee:
Turkish Lira:
South African Rand:
Mexican Peso:
After this week’s moves, the U.S. dollar is trading above the 200 day moving average vs. all of these currencies. Some of them have broken down to new 1 year lows (and the dollar to new 1 year highs), with the South African Rand the weakest given its exposure to the precious metals sector.
These are massive moves. Business owners and individuals who buy goods priced in dollars, but earn money in their own currency, have lost 5-10% percent of their spending power in the past month. More importantly, many emerging markets corporations and banks fund themselves in dollars (since it’s a lower interest rate than their domestic currency), and they are finding themselves in a squeeze as the dollar goes higher. It will cost them an increasing amount of local currency to pay back those dollar-based loans.
As the funding currency of the world, the dollar’s weakness has been a boon to emerging market investment for the past decade. I anticipate further emerging market economic weakness in the months ahead as businesses pare back investment and consumption to make up for the currency’s fall against the dollar. Whether that eventually leads to broader financial market weakness remains to be seen.