The Dark Side of the Moon of the US Dollar
12 July 2022
"Money! New car, caviar, four star, daydream. Think I'll buy me a football team" - in case you don't recognise them, these are the lyrics of the first verse of Pink Floyd'sfamous 1973 song Money (the only one on the album to reach the top 20 / listen to the opening bass notes here).
Money is a worrying subject at the moment, especially if you're interested in what's happening in the foreign exchange market.
You may not have noticed, but this morning was the first time since 2002 (20 years, yes) that the dollar was stronger than the euro (this applies to the whole Dollar Index) - it may not look like it, but it's important! -.
Indeed, apart from the fact that the budget for your holiday in the Hamptons this summer is likely to be a little overweight, it is also the financial markets as a whole that could have difficulty digesting the news.
Let me explain: for several years now, the markets have been moving in line with the prospects of US growth companies - ever higher, ever more beautiful, which is what led us to the valuation peak we saw in late 2021 - early 2022.
Now, these companies are starting to have a fundamental problem: continuing to post great growth numbers. And on that last point, I'm back to my sheep, the current high dollar should make it much harder for them to do so.
Why, would you ask me?
- Because Apple makes more than half of its sales outside the United States
- Because for Nike, it's about 2/3 of the business that is international
- For Amazon, a little less than half of its results are generated outside North America
- And finally, because this observation applies to almost all the companies in the S&P 500
In short, these brands need to sell their products and services all over the world - things that we international customers should be less and less inclined to buy as the dollar becomes more valuable against other currencies.
So there is a good chance that Apple and its sister companies (who do not have the scalable margin to reallocate these currency effects to their customers outside the US - the latest iPhones and Jordans are already costing us enough, aren't they?), will see their results impacted by these outsized movements*.
"New car, caviar" or "old phone, old shoes", that's what the results and forecasts that will be released in the coming days will show us.
Have a great week,
Max
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*regardless of currency hedging positions
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