Goldman Sachs is wrong about the dollar, according to Cornerstone Macro in a report published on Monday. Cornerstone Macro is top ranked in macroeconomics research by Institutional Investors.
The debate is always: What's been driving the dollar? Goldman Sachs, for instance, believes foreign central banks' monetary easing policies have been the catalysts that will push the U.S. dollar higher. See my April 23 blog " Goldman: The Dollar Rally Is Not Over".
Cornerstone Macro's Francois Trahan and team take a different view.
"Our work suggests that the bulk of dollar strength [over the past several quarters] has been a function of a global growth slowdown," wrote the analysts. "Given that the U.S. dollar remains the world's reserve currency, it often sees inflows during periods of global weakness and outflows during periods of global strength -- few other countries have this "safety" component that the U.S. dollar experiences."
But the U.S. economy, being so large, is after all a "lower-beta" economy. How fast can the US grow? 2%, 3%? Meanwhile, "when the global economy picks up there are usually other areas of the world where investors can find larger returns from earnings and interest rates." A pick-up in global growth will likely translate into money outflow and a weaker dollar.
The year 2015 started with slow global growth - "the number of Global PMIs below 50 increased each month this year -- led by emerging economies" - but now that we are almost halfway through the second quarter, we are seeing slight improvements, led by the Eurozone thanks to the European Central Bank's easing. Cornerstone Macro sees the Eurozone to have bottomed in March and expects Britain to bottom in May. In Japan, corporate earnings have been ticking up too. Eurozone has 16% of the trade-weighted influence on the dollar.
In the last few years, as the dollar was appreciating, a few investment themes have performed well. Domestic companies have outperformed multinationals and consumer stocks have outperformed commodities.
But as the dollar reverses its rise, it is time for us to rotate back into multinationals, whose sales can be boosted by weaker dollar, as well as commodities, which are quoted in the dollar, advised Cornerstone Macro.
What does this mean for Asia markets? This month, we see that Indian IT consulting services companies from Tata Consultancy Services to Infosys all missed March quarter earnings, in no small part due to a sinking euro. Will they perform better in the June quarter? See my April 22 blog " Why Indian IT Companies Fell Short Of Expectations"
Further, commodities trade almost as mirror images of dollar, noted Cornerstone Macro. So we can expect commodities to rebound as the dollar falls.
Checking in on prices, on Tuesday in New York, the dollar index fell a fifth day, now 4.2% off its March 13 high. The Powershares DB US Dollar Index Bullish Fund ( UUP) dropped for 4 consecutive trading days. Australian dollar climbed above 80 for the first time since late January and iron ore rose 1.3% to close just below $60. BHP Billiton ( BHP) is the best performing iron ore producer, rising in the last 5 trading days and up 13.5% this year. Meanwhile, Rio Tinto ( RIO) gained 1.7% this year, while Brazil's Vale ( VALE) is still down 3.7%.
Gold moved above $1200. The SPDR Gold Shares ETF ( GLD) and iShares Silver Trust ( SLV) rose 0.9% and 1.3% respectively.
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(END) Dow Jones Newswires
April 29, 2015 00:15 ET (04:15 GMT)
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