Washington Is Writing Our Investing Playbook, So Let’s Follow It

Global trade has an enormous influence on the financial markets and worldwide economy.

So when the currency that serves as the guidepost for valuing assets drops 1 percent, all investors are affected. That’s exactly what happened to the U.S. dollar last Thursday.

The PowerShares DB US Dollar Index Bullish Fund (UUP), which compares the greenback against a basket of major currencies, posted the fourth-biggest decline in a year after the announcement of the debt deal in Washington. International investors soured on America’s ability to pay its bills.

UUP also was turned back at a logical point of resistance (please see below the red line in the chart), which provided further support for investors hoping for a weak dollar.

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The Federal Reserve watches the impact of the dollar’s value on emerging economies. An economic warning from China not only increased the odds of additional Chinese stimulus, but it also raised the odds that the central bank will push off tapering its massive $85-billion-a-month bond-buying program.

Stock investors seem to think so. From Reuters:

China’s exporters face a difficult time in coming months as demand from emerging markets slows, the Chinese trade ministry warned on Thursday after the latest trade data showed sales to Southeast Asia slowed sharply in September. But China is ready to take measures to support its exporters to ensure the trade sector grows 8 percent this year as targeted, Commerce Ministry Spokesman Shen Danyang said, allowing exporters to see “mild growth” in the next few months.

A weak dollar boosts demand from emerging markets.

The Fed desperately wants to back away from its non-traditional forms of monetary stimulus (i.e., quantitative easing). The news from China won’t help, nor will the recent U.S. government shutdown. From Bloomberg:

The government shutdown and debt-ceiling debate prompted Fitch Ratings on Oct. 15 to put the U.S. on watch for a possible credit downgrade. S&P said the impact of the impasse was worsening by the day and had shaved at least 0.6 percent off fourth-quarter growth, taking $24 billion out of the economy. The ratings agency forecast 2 percent annualized growth in the fourth quarter, down from the 3 percent seen last month.

Knowing this, what should U.S. investors do? A weak dollar supports increasing demand for assets that get a tailwind from a lower greenback, including emerging markets (the exchange traded fund whose ticker is EEM), foreign currencies (the euro), commodities and foreign stocks.

So there’s the playbook until something changes.

Best wishes,

Douglas