Despite inflation reaching a nearly 4-decade high in November's CPI report and an accelerated monetary tightening policy from the Fed, the US Dollar (DXY) continues to strengthen. This counterintuitive domestic currency appreciation is due to several factors:
- Fed Chair Jerome Powell's central banking regime is much more laissez-faire (accommodative to public markets) compared to other major central bank administrations, which are taking on more hawkish monetary policies. The Bank of England was the first major central bank to initiate liftoff last week, and the European Central Bank (ECB) looks like they may follow suit, which is at least 3 months out for the Fed. This relative monetary accommodation makes the US dollar more attractive.
- The US dollar is tied to US assets, which have also risen in relative allure.
- The recent fear-fueled rush to US Treasuries, which is considered the global market's "risk-free" bond, not to mention yields are much stronger than most developed nations.
- Our innovation-fueled economy is looking at healthy 2022 growth coupled with the Fed's accommodation, causing US equities to look ripe for a buy at their recently discounted valuations.
- The US dollar backs most commodity futures contracts. Excessive inflation has elevated volatility across all commodities pushing more global companies to hedge in the futures market (this volatility also brings in more global traders).
- At the end of the day, the safety of the US dollar and the asset classes it opens up to investors and corporations is the reason for its recent buoyancy.
The US dollar has been ripping higher since the Delta-variant showed up this summer, but its relative buoyancy looks to be at risk as we head into 2022. Analysts are focused on monetary policy sentiment from both the ECB and the Fed for clues regarding currency risks.
The US dollar may be at risk of 5%+ depreciation in 2022 as the slowly recovering European economies scamper out of the pandemic's grasp. Depreciation of the US dollar would put further pressure on this country's already highly inflationary environment, making foreign product/material sourcing relatively more expensive.
However, there are notable benefits to a declining domestic currency.
The upsides to a weakening US dollar can be characterized by elevated international business activities (travel & investment) and more demand for US goods (tailwind for net exporters).
Some unique investment opportunities are revealing themselves on this notion of a 2022 dollar depreciation.
2 Beneficiaries Of A Weakening Dollar
Multinational corporations with significant operations abroad have been among the most adversely impacted by the US dollar's 7% relative appreciation over the past 7 months. Combining this with slower than expected global economic recoveries, you get the perfect storm for valuation compression in net exporters, which we are only now emerging from.
Boeing (BA) has been the largest US exporter and the world's leading aerospace company for decades but has recently fallen victim to the pandemic's wrath. BA had already been experiencing a descent going into the pandemic following devastating system errors in its most demanded 737 Max, resulting in two fatal crashes, which grounded this aircraft from March 2019 to March 2021.
BA is now trading at less than half the market valuation it had in March of 2019 but looks ripe for a buy as orders begin flooding back in with the world economy looking towards a bountiful resurgence in the coming months. This aerospace titan is only looking up from here, and the elevated odds of a weakening US dollar make its profitability outlook that much stronger.
10 out of 13 analysts call BA a buy today with a consensus price target of $270 (35% upside).
Opportunity In Energy
The US became a net exporter of energy (oil & gas) in 2020 as fracking operations took off. US energy producers didn't slow production nearly as much as OPEC+ when the pandemic hit, which drove up relative market share along with catalyzing the unprecedented negative price tag in April of 2020 when reserves reached a critical mass.
Energy prices have surged out of the medically induced global economic coma with a vengeance. However, the worldwide surge in Omicron-cases has the market nervous, creating a nice little trading opportunity with a weakening US dollar and soaring LNG (liquified natural gas) demands being a key catalyst.
Chevron (CVX) and its best-in-class operations provide the perfect way to buy the dip in this momentum-charged sector with the highest return potential.
Chevron is an energy powerhouse with LNG operations that position it for the future of (lower emission) energy. With its savvy purchases across the Permian and Marcellus basins, the enterprise has established itself as a leader in the US oil industry (2nd largest US energy company behind ExxonMobile). I dare to call CVX an oil growth stock, but it has all the makings of a long-term winner.
Despite what oil critics say, I can assure you that the world economy is far from kicking its addiction to fossil fuels. Analysts project that natural gas and oil demand will continue to rise over the next decade with revving energy needs (LNG is expected to be a winner). CVX is poised to drive substantial profits throughout the roaring 20s.
I deem that Chevron's 4.7% dividend yield is almost as safe as US Treasury Note. The oil industry's commitment to maintaining its dividend regardless of financial adversity (short of bankruptcy) is unprecedented. Chevron has proven to have the liquidity to support its endlessly growing yield in even the most devastating economic environments. Chevron maintained its dividend through the past 18-months of economic shutdowns and actually raised its quarterly payout in Q2, which none of its major competitors can boast of.
The firm has already returned to pre-pandemic profitability levels, remarkably faster than most of its competitors, yet its share price remained below its pre-COVID high in January 2020. I expect that currency tailwind will further fuel CVX's upside potential.
Sell-side analysts have been getting increasingly optimistic about CVX, with 13 out of 17 analysts calling this a buy today and a consensus price target of nearly $130 (more bullish targets above $150).
Final Thoughts
When assessing beneficiaries of a weakening domestic currency, focus on where the company in question conducts most of its business and where they source materials (if at all). Net exporters are the easiest to evaluate as clear-cut victors of a weakening dollar, assuming their primary trading partners aren't in the same depreciating boat.
Domestic travel & leisure stocks can also benefit from a weakening currency. Foreign travelers are increasingly enticed to visit a destination as the relative exchange rate drops.
Happy Trading!
Dan
For more headline-fueled trades and insight, check out Dan's daily market commentary in the Headline Trader portfolio.
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