Icon8888 Gossips About Stocks
(Icon) End of Strong USD ? Time To Shun Export Counters ? Not So Fast
1. Introduction
Yesterday, one forum member wrote an article calling for people to shun export counters due to recent softening of USD. I do not really agree with that view. On the contrary, I believe recent developments point to possibility of further strengthening of USD in coming months.
2. Trump's Comments
The recent softening of USD was caused by Trump's comments few days ago that "USD is too strong". That was actually the second time he said something like that. Few months ago, Trump said "strong USD is killing us". As a knee jerk reaction, USD softened for few days. But it subsequently rebounced. Don't be surprised if the same thing happens again.
3. USD and Presidents
The reason why currency markets reacted to Trump's comments is because there is belief that US Presidents hold great sway over the direction of USD. Mark Möbius made such a comment few months ago, "When a U.S. President wants the USD to move in one particular direction, he always get what he wants." Mark Möbius is a seasoned investor. A very wise and credible person. What he said should not be simply brushed aside. With that in mind, I did a quick study of how US Presidents had intervened in currency market in the past to influence the direction of USD.
4. Obama and Quantitative Easing
As we all know, in the past few years, the Obama Administration embarked on so called "Quantitative Easing" which essentially involved printing money non stop. With huge increase in supply, the USD softened substantially over the past few years.
At first look, it seem that the U.S. President can in fact determine the direction of the USD. He did that by playing with monetary policies. However, if you think a little bit deeper, that was not really the case. I would argue that Obama was able to bring down the USD because it was in line with the macro trend. The U.S. was stuck in a recession and inflation was low. This created a conducive environment for him to undertake his Quantitative Easing.
To sum it all up - a US President, no matter how much policy levers he has, has to operate within the system, which is driven and determined by market forces. In such a system, the President cannot single handedly determine the direction of the USD. What Obama has done is to follow the major trend and amplify the effect.
5. Plaza Accord
Another very famous case whereby the US government intervened to bring USD down was the Plaza Accord. In the 1980s, the USD was very strong. Naturally, that resulted in high trade deficit and loss of export competitiveness. The U.S. government was very unhappy about that. In 1985, the leaders of 5 countries - US, Britain, France, Germany and Japan met in Plaza Hotel in New York City. At the end of the meeting, the five countries agreed to cause the USD to depreciate. Over the next two years, the USD depreciated by closed to 50% against the Japanese Yen (and weakened against other currencies also).
50% depreciation over a period of two years !!! Isn't that another proof that the U.S. President can single handedly determine the direction of the USD ?
Nope. If you take a closer look at the details of how it was done, you will realise that it was not as simple as that.
The depreciation of USD pursuant to Plaza Accord was achieved through COORDINATED actions by the five governments. Please refer to the following information extracted from Investopedia :
"Germany agreed to tax cuts, the U.K. agreed to reduce its public expenditure and transfer monies to the private sector, while Japan agreed to open its markets to trade, liberalize its internal markets and manage its economy by a true yen exchange rate. All agreed to increase employment. The United States, bearing the brunt of growth, only agreed to devalue its currency."
http://www.investopedia.com/articles/forex/09/plaza-accord.asp
The insights I gained from studying the Plaza Accord is that to drive down the USD, you require the cooperation of other countries and central banks. They will have to drastically change their macro economic policies so as to cause the currency market to move in the targeted direction. Words cannot achieve that.
The U.S. was strong enough in the 1980s to force its allies to undertake such drastic changes. That was because they all sought safety under its security umbrella against the threat of Communism. In today's world, if Trump really wants to depreciate the USD, it needs to work with China, its biggest trading partner. Can the US President force China to change its macro economic policy to pull off another Plaza Accord ? The answer is a definitive "No". China is no Japan. It does not rely on the US for security. It is also big and strong enough to resist coercion. Another Plaza Accord is simply impossible.
6. The China Factor
In 2016, US registered trade deficit of more than USD350 bil with China. Trump complained loudly about that. On 7 April 2017, Xi Jinping indicated to Trump that China is willing to work with him to reduce the deficit. They have kicked start a 100 days process to sort out the details.
I believe Xi is sincere in giving some concession to the U.S. This is because China needs another 10 to 20 years to outgrow the US. It is willing to cede some ground now just to get Trump off its back. It is unlikely that the talks will result in elimination of the entire USD350 billion deficit. But a reduction of even USD100 billion could be a big win for Trump, which he can tweet until his fingers fall off. China can do that without hurting itself much. For example, instead of buying soybeans from the Brazillians, they will buy more from the State of Iowa. Or maybe buy some shale oil, now that US has started exporting this commodity.
In my opinion, in the event that the reduction in trade deficit happens (which is very likely as China is fully capable of delivering USD100 billion), the currency market will go crazy. USD will strengthen substantially, probably to level we have never seen before.
7. Concluding Remarks
According to my study, it is only partially true that the U.S. President can influence direction of USD in a significant way. In Obama's case, he managed to guide the USD down in line with the macro trend. But now the U.S. is more or less out of recession and enjoying strong employment. Whoever the President is now, he has lost that flexibility to print money. It will cause inflation to spike. Instead, the general trend now is to tighten up. We can forget about using QE to press down the USD. It won't happen.
As for Plaza Accord type maneuver, it requires cooperation by U.S.' major trade partners. Back in the 1980s, the U.S. government can pull it off by arm twisting its junior allies. But this is not possible now with China. It simply won't play balls.
Now that we have eliminated the possibilities of the above two events happening, what is left is the macro economic factors. Many of the bullish factors that support strong USD (strong employment, potential rate rise, potential tax cut, massive infrastructure spending, etc) are still in place. On top of that, one major catalyst will be if China really deliver concession to reduce trade deficit, the USD will be on steroid and run wild.
In my opinion, it is still too early to call the end of USD rally.
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Discussions
8 people like this. Showing 50 of 53 comments
i think many misunderstood what trump means, or did not read deeper what trump really wan in his mind, trump ultimate target is to grow US economy, naturally inflation will go up along the way, then interest rate has to go up. this will create super strong USD which will hurt trump GDP target. what he want is USD to stay as it is now without further strengthen too much, preparing a conducive environment to supercharge US economy. strong USD is here to stay. remember current US interest rate is really low, no way near to level where economy really hot.
2017-04-14 20:11
USD/MYR is determined by strongness of USD and MYR. As long as two more rate hikes in 2017 are on the table, USD will not weaken so much. Ringgit may get stronger in a few month. But as long as USD is strong enough, USD/MYR is not likely to plunge. USD's being strong enough means two more rate hikes in 2017 on the table.
2017-04-14 23:53
You should differentiate between long-term and short-term trends. The trend you see now may not last for a long time.
2017-04-15 00:18
with Ah Jib around, you will never have a strong ringgit. Period.
just hope they don't down grade your currency .
so stock market strategies based on a strong currency is wishful thinking.
2017-04-15 07:00
as for Trump, he will align himself to the emotional brain, nothing from the processing brain.
2017-04-15 07:10
Strong US $ is determined by the Fed. Just watch The Fed, dear all here. ;-D
2017-04-15 12:46
1. All macro data suggests a weak malaysian ringgit, but bank negara already cut off all tools avaiable for anyone to make it weak, so the strength of myr is highly correlated to import, export activities.
2. Trump maybe questionable in a lot of decisions he made, but he got means to get things done.
2017-04-15 12:59
Business Star today pg 17........
Foreigner sold down Malaysian government bonds from $ 247 billion to $ 178 billion from Oct 2016 to now.............
converting to riskier asset class such as equity............no net inflow of funds...hardly the kind of stuff that suggest ringgit will go up.
2017-04-15 14:35
from bonds to riskier assets.....
if...........a flight out of riskier assets , will cause a stampede, father mother also cannot recognise.
2017-04-15 14:38
Icon always wrote fantastic articles. Waiting for icon to write another one for JHM.
2017-04-15 15:51
If it is so easy to talk a currency up or down, every gomen would have done it long ago. No need to rein in deficit. No need to move interest rates up or down. Can overspend like no tomorrow.
I agree with Icon, all these are some burst of hot air to pander to the fantasies of futures traders.
The Plaza Accord type of intervention leads to the recession that Japan never recovered. It also leads to the 1997 Asian crisis.
What a brillant insight, Icon.
2017-04-15 17:51
On the lighter side, this what the fung shui master, Lynn Yap, said abt 2017.
1) The USD will remains strong. 2) Oil price will rise a little but will remain stable towards the end of the year.
2017-04-15 18:00
The kid wants his sweets and do not want accountability.
Sweets for Wall Street, for the army, for the contractors, for the rich and powerful
Too bad , no sweets for the poor because the poor to them means blacks and Latino, the rapists and the laborers.
2017-04-15 19:17
America is a dysfunctional state, dying by a thousand cuts witha Nero as President.
This is not Plaza Accord era
America cannot offer leadership and solutions. This is East Asian era.
2017-04-15 19:43
There was no nuclear test in North Korea on 15 April. I expect world stocks will surge on Monday.
2017-04-15 23:47
US will go to war if its economy is in depression. Beware of war started by US to make a US war economy. US war economy benefiting & prospering US economy. Trump had shown to the world that he was trigger happy with dispensing bombs in Syria & Afghan. SAD things happen in 2017.
2017-04-16 06:04
America is not what I always assumed them to be when I was young.
They could start a war by planting false flags.
I saw this more clearly when OOOpama & Highclinooton were in power and now, you could see why Trump won the Presidency in many, many U-tube series...
America is a dangerous country:
http://www.pravdareport.com/opinion/columnists/13-03-2014/127106-america_mask-0/
Taiko Icon8888 gives a good description. Let's pray that there is no war so that everybody can live the lives that he is familiar with - no additional stress please.
2017-04-16 06:20
SEOUL (Reuters) - A North Korean missile "blew up almost immediately" on its test launch on Sunday, the U.S. Pacific Command said, hours before U.S. Vice President Mike Pence was due in the South for talks on the North's increasingly defiant arms programme but fails to launch missile.
...........................
How this Monday? stock down bcos Nkor test missile on Sun 16?
Fat boy doesn't care abt US aircraft carrier been sent to Korea.
For Fat Boy, if Nkor die , US also die together. Nkor has nothing to lose bcos it is a poor nation but US has every thing to lose. Sad :-(
2017-04-16 08:27
Why scientists are fighting back. We’ve had enough of Trump’s war on facts
In such circumstances, how do you predict or even make sense of what the kid President says?
2017-04-16 09:29
Obama 8 years were very logical years......
Hillary is a very fine woman.
2017-04-16 09:31
KEY PRINCIPLES TO INVESTING IN A STOCK
In this article we look at the four keys that we believe every stock investment should have. These are not new things but rather the core principles that successful investors have been following for decades.
1. Invest in sectors and industries that you understand –
Becoming an expert in certain areas of the market will give you an upper hand when it comes to selecting stocks to buy. This is like a foundation for all other steps that follows. Pick a given sector or industry and try to get information on it as much as possible. This will enable you to make informed decision when it comes to buying stock.
2. Find companies with a Long-Term Competitive Advantages –
Companies with long-term competitive advantage have an ”economic moat” i.e. Economic protection. These companies have the following advantages:
A recognized brand.
The ability to produce products cheaper than anyone else.
The ability to sell their products cheaper than anyone else.
Barriers to entry that make it difficult for competitors or new companies to compete.
The opportunity to grow at a cheaper cost than anyone else.
A duopoly situation where two companies dominate the industry like Airbus or Boeing.
Networking effect where the users of the product or service makes the business more valuable like Google.
3. Look for companies with Excellent Management –
This can be done by reading annual and quarterly reports and studying the history of the company’s current management in an attempt to understand what the management is currently doing and what they may do in the future. You can look at the following:
The management’s history of decision-making. Do they have a track record of someone who we would actually hire if given a choice?
Understanding how management is compensated. Is their compensation based upon the success of the firm?
Ensuring that management is shareholder friendly. Do they do things that have the best interest of shareholders in mind?
These questions will help you to answer the question as to whether or not we trust the management enough to purchase the stock.
4. Buy When the stock is at a Good Price. Discounted to Intrinsic Value —
Find stocks that are currently trading below the market price. If you can be able to find stocks that are trading below their intrinsic value and have the other three core principles then we would have the formula for a sound stock investment. If you find a stock with the first 3 principles but is not trading below the market price, then it is better you wait. Any investor should know that the price at which he/she pays at, is a critical piece of investing. If you get it wrong then the investment will have a hard time making money.
Bottom Line
When all the four principles align then the possibilities of making money increase, though this does not guarantee that you will make money but rather increases the probability of making money.
2017-04-16 10:58
Trump sabre-rattling on North Korea has a flaw: Kim Jong-un has nothing to lose CBS News-- The Guardian 5 hours ago
Strategy of sending in the US navy and attacking Syria and Afghanistan likely only to boost Pyongyang's nuclear resolve.
..............................
Me →There u have this. Kim got nothing to lose if US chooses war.
2017-04-16 18:44
If he starts a war, he is likely to get killed.
North Korea missile launch 'no surprise, no need to expend resources' - U.S. foreign policy adviser
http://www.thestar.com.my/news/world/2017/04/16/north-korea-missile-launch-no-surprise-no-need-to-expend-resources--us-foreign-policy-adviser/#1KCxdt3ljU4m5UtA.99
2017-04-16 21:00
If RM strengthens against dollar...its bad for plantation and furniture.
How about steel?
2017-04-16 21:00
I think excess risk-off sentiment will be corrected on Monday as there was no nuclear test in North Korea on 15 April. Stocks especially small caps are expected to rebound.
2017-04-16 21:06
White House foreign policy advisor traveling with Mr. Pence said the U.S. has evaluated that the missile was not an ICBM, but probably a medium-range missile, and that it failed “after about four to five seconds” after launching from the same North Korean Navy base as another test on April 5.
http://www.washingtontimes.com/news/2017/apr/16/vice-president-mike-pence-calls-north-koreas-faile/
2017-04-16 22:05
no.....just that the era of strong US$ is over.
probability > Apr 27, 2017 12:00 AM | Report Abuse
will export stocks tumble?
2017-04-27 00:02
a weaker US$ does not destroy Malaysian exports.
I mean....no catalysts from exchange gains....but exchange rates is just a component of trade...a medium of exchange and valuation....but does not destroy the whole trade.
2017-04-27 00:09
i can agree on that...
Posted by stockmanmy > Apr 27, 2017 12:09 AM | Report Abuse
a weaker US$ does not destroy Malaysian exports.
I mean....no catalysts from exchange gains....but exchange rates is just a component of trade...a medium of exchange and valuation....but does not destroy the whole trade.
2017-04-27 00:12
so only airasia and aax? Guess not only the kerosene users gain..all the gasoline, diesel, consumers would also benefit...
2017-04-27 00:18
When I say the era of strong US$ is truly and permanently over, the time scale is measured in years and decades....not hours and days.
2017-04-27 00:42
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