Without question, the biggest conversation in our market today is trade. Whether you reference China, Canada, or Mexico, choose to discuss soybeans, dairy, or livestock products, trade is the 700 lb gorilla in every market discussion. As an industry that has invested heavily into our participation in global markets, the 10 month disruption to trade has cost us dearly. While politics are the highlight of the disruption, other forces will continue to affect trade...even if we get a deal. One of those is currency valuation.
The US Dollar Index (USD) rose to its highest mark in the 2019 calendar today. See chart above. As a review, the US Dollar Index is a measure of the comparative value of the US currency to a basket of other currencies. That basket is constructed and weighted in the following manner:
Euro (EUR), 57.6% weight
Japanese yen (JPY) 13.6% weight
Pound sterling (GBP), 11.9% weight
Canadian dollar (CAD), 9.1% weight
Swedish krona (SEK), 4.2% weight
Swiss franc (CHF) 3.6% weight
As the first 6 weeks of the year have unfolded, the "Dollar" has slowly been climbing out of a hole that was dug in Q4 of 2018. Moreover, it continues the climb that began last April shortly after President Trump announced the steel and aluminum tariffs that were being considered. The lack of a deal with China and the uncertainty surrounding the ratification of the USMCA have given our currency lift.
Speaking broadly, dollar strength is found in any development that presents a more nationalist US agenda. Additionally, this can come as a result of destructive forces in other countries, specifically those whose currencies are represented in the US Dollar Index basket. Remember, this is a comparative index. Our dollar can rise on its own strength relative to the basket or as a function of currency weakness elsewhere.
On that note, the current status of BREXIT has many in Great Britain concerned about the future of their economy. But that concern is shared by all of the EU. Jointly, a weaker pound sterling and a weaker Euro currency has given rise to the US dollar index. Further, the ongoing decline of the Yen stems from cooling economic signals and a darker 2019 outlook. The weaker Yen has given the US dollar added lift. Even the Canadian dollar has been getting into the action, erasing some of January's currency gains over the course of the first days of February.
But as you will note, this is not the first time the USD has rallied. Other events in our past have given rise to some of these more prolonged gains in the last five years. The Trump election saw some play at the end of 2016. However, the biggest influence came in 2014 when the Fed decided to unwind Quantitative Easing, essentially removing dollars from circulation and consequently ending the commodity price inflation that followed the 2008 financial collapse. As was witnessed then and can be witnessed now, a strong dollar does not favor commodity price inflation. Further strength in commodities will be challenged by any ongoing strength in the US dollar relative to other currencies.
To talk through strategies to manage this risk, contact us via the information below.