An Atypical Trade in Today’s Market: A Weak US Dollar

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Weak US Dollar - Weakening USD

I looked at the portfolio of my colleague Greg Canavan this morning.

Shiver me timbers!

Four of his gold stocks are currently showing gains of 229%, 396%, 121%, and 231%.

It’s one reason I listen to Greg when he speaks.

Every Monday the editorial team here at Fat Tail Media get together for a chin wag on the markets.

There’s an irony to this.

We speak more now that we all work from home permanently, instead of when we were dropping in and out of the office on different days!

Greg made an interesting observation.

It’s this: The US dollar looks very weak at the moment. That’s atypical.

For decades the US dollar, and US dollar assets, have been the ‘go to’ space when big trouble hits the world.

It was only back in March that I read the following in The Economist

The greenback is as central to the world economy as it ever was. If there are hidden strains in cross-border finance, they will eventually be revealed by spikes in the dollar.

Look around the globe right now. A pandemic is bringing the global economy down to its knees.

Governments are running big deficits again to ward off a slump into a full-blown depression. The run in gold is signalling that investors are nervous about the future.

The old market script would normally see the US dollar soaring. Except it’s not happening.

MarketWatch reports that the USD has fallen to a two-year low against a basket of its major rivals.

Why do we care?

What a Weak US Dollar Means:

One of the major currencies ‘rivalling’ the US dollar is the Chinese yuan.

This currency does not freely float on world markets in the same way. But a decline in the US dollar implies a strengthening of the yuan too.

It can’t be any other way.

Why does this matter?

We know that China is using its ‘One Belt, One Road’ infrastructure plan to create a trade bloc across Asia and Africa that puts Chinese capital and its domestic economy at the centre.

The natural progression of this plan would be to make the Chinese currency the ‘de facto’ way of facilitating this trade.

China is the world’s largest importer but it must use US dollars to buy and sell on the world market.

That was OK when China produced low value goods and a cheap currency was a means to establishing an export industry.

China has moved beyond this basic framework years ago now. Companies don’t even look for low cost labour in China anymore.

Point being: A falling US dollar strengthens Chinese soft power around the world and lessens the US’.

It’s possible the US dollar really tanks in the next year too.

The Federal Reserve is creating so many — trillions — and the US deficits are so huge that the market probably can’t absorb them all.

You don’t have to believe me on this. The rise in the Aussie dollar over 70 cents to the USD shows it in action.

There are share market investment implications to this. Any firm that benefits from a strong Aussie dollar is likely to have increased buying power.

And conversely, a firm that receives US dollars is likely to see the value of those diminish once they’re converted back into AUD.

That’s a payoff and risk to be conscious of when you review your portfolio.

But there is a geopolitical aspect to this as well.

A major decline in the USD would come at a very awkward time for the Trump administration.

It’s possible, for example that the US would need to ‘defend’ the dollar if it began to fall precipitously.

That could mean higher domestic interest rates or budget cuts that hurt the US economy.

Neither is very palatable when the US is clearly instigating a new ‘Cold War’ with China.

This dynamic bears close watching in the next six months.

My friend and colleague Greg Canavan says there is no more important story for your wealth right now.

Greg is no stranger to profiting from these powerful shifts.

You’re reading about the gold boom in the national press now. But Greg has been on this story since 2017. You saw the results above.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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