Surging USD a sign of market pessimism, but isn’t necessarily a challenge for companies
AFTER a first-half fear fest, investors have moved on to the next concern: a surging US dollar (USD), which many fear will spark an Asian market exodus.
The greenback is up 8.4 per cent this year against a trade-weighted global currency basket, and 15.5 per cent since last June. It sits near multi-decade highs versus the euro, Japan’s yen and Britain’s pound. Even multiple tightenings by the Monetary Authority of Singapore haven’t stopped the Singapore dollar from sinking 2.9 per cent versus the USD this year.
But don’t fret. Dollar doldrums are less about economics and more about pulverised sentiment, which is a counterintuitively bullish sign for 2022’s remainder.
Today’s USD rise stems largely from America’s world-leading interest rates—tied to United States Federal Reserve hike hysteria and investors seeking safety amid the year’s myriad fears. Bears say Asian central banks are stuck between matching the US tightening or letting their currencies plunge. Some fear a 1997 redux.
Back then, many of Singapore’s neighbours defended USD pegs with massive, unsustainable foreign exchange interventions. They were forced to scrap the pegs suddenly when reserves ran dry. Instant devaluations jacked up USD-denominated debt costs.
How does that compare with the situation now? Outside Hong Kong—which is armed with enormous reserves—the pegs are gone. Forex reserves are fine. Yes, Singapore’s are down 25 per cent since 2021’s end, but they still total US$314 billion. Some warn Thai baht trouble brews. But through Q2, Thailand retained 90 per cent of 2021 reserves—over US$200 billion, which is far from 1997’s empty coffers.
Lazy maths underpins the claims of currency doomers. Yes, Singapore stocks have a 0.42 long-term correlation with the SGD’s moves against the USD. Given 1.0 is lockstep movement and -1.0 is the polar opposite, that indicates some minor tendency for city stocks to rise and fall with the SGD.
But correlation isn’t causation. Consider 2020. The SGD hovered around 2019’s close throughout January of that year, even as Singapore stocks hit a high on Jan 17. The SGD’s slide began in earnest only in February, accelerating in March as global lockdowns spurred a flight to USD safety. World stocks and the SGD bottomed on Mar 23, with the SGD surging 10.5 per cent through 2020’s end as fears ebbed. The SGD paralleled stocks’ moves—but it didn’t cause them.
Similarly, through the period leading up to 2009’s global bear market, the SGD climbed for 8 months after Singapore stocks’ October 2007 peak. Mounting fears triggered another flight to USD safety in 2008’s back half. The SGD sank 13.5 per cent, bottoming on Mar 2, 2009—one week before stocks. Easing global fears reversed USD demand. The SGD jumped 10.9 per cent from its low through year-end as stocks soared—correlation, not causation.
The SGD as well as a major currency basket had both led the US dollar as late as Feb 23, 2022—the day before Russia’s invasion turbocharged global fears. As fears fall in 2022’s second half, Asian currencies should rebound—like in 2020 and 2009.
If currencies truly drove stocks, US and Singapore equities would flip-flop leadership as their dollars wiggled and weaved. They don’t. SGD movements versus the USD have a 0.06 correlation with Singapore stocks’ performance against America’s S&P 500—statistically no relationship at all.
What if I’m wrong? A USD this strong still doesn’t mean money flees Singapore.
Whilst the SGD strengthened during 2009, it still traded below today’s levels against the USD nearly all year. Singapore stocks soared 75.4 per cent.
In 2003 and 1999, Singapore stocks returned 36.7 per cent and 61.1 per cent, respectively, trouncing the US. Yet the SGD never topped today’s USD value, trading directionlessly instead against the USD in both years.
In my last column, I said I don’t expect Singapore stocks to lead the coming recovery. But this proves a strong USD doesn’t preclude non-US markets jumping, too.
Many global investors fear a strong USD dooms American multinationals. Not so!
The strong greenback does make American exports relatively more expensive. With roughly 40 per cent of S&P 500 revenue coming from abroad, that sounds scary. But most multinationals have vast operations outside America and source products globally. Costs paid in now-cheaper foreign currencies mitigate dollar headwinds. Also, virtually all big multinationals hedge against currency fluctuations—limiting the impact. Many analysts cite sales in constant currency terms, knowing the swings are fleeting.
Remember: Currencies always trade in pairs, not against absolutes. Hence, one country’s headwind is another’s tailwind—one reason to always think globally.
USD doom flares whenever broader fears perk. So, take a different view of currency worries—not as economic hints, but as sentiment gauges. Today, they indicate pessimism reigns. And pessimism tees up the positive surprises underpinning new bull markets. Look past the widespread worry to the approaching rebound.
The writer is the founder, executive chairman and co-chief investment officer of Fisher Investments, an independent investment adviser serving both individual and institutional investors globally.
