China, India, Indonesia, Russia, Canada, Sweden, Denmark. Those are just some of the nations that felt compelled to lower rates in 2015. Several rate-cutting countries may genuinely warrant stimulus to bolster economic activity. Others have engaged in currency depreciating tactics in reaction to electronic money creation by the Bank of Japan (BOJ) and European Central Bank (ECB). Either way, the currency wars have been getting uglier by the minute.
How bad is it getting? The euro has slumped roughly 20% against the dollar in a mere seven months. And that’s just the deterioration of the euro-zone’s medium of exchange for goods/services since the president of the ECB, Mario Draghi, pledged to create hundreds of billions of euro “credits.” Chart enthusiasts can visualize the decimation by following CurrencyShares EuroTrust (FXE).
The timing of Japan’s massive yen-creating gambit may be different, but the results are the same. CurrencyShares Yen Trust (FXY) aptly depicts the erosion in value of Japan’s currency.
Why is this so troubling for U.S. stock investors? The pace of the dollar’s rise against worldwide currencies suggests a number of undesirable outcomes for the U.S. economy. First, there’s the loss in export competitiveness. In fact, the U.S. trade deficit just hit a record high (excluding oil). Secondly, corporations have to endure the disintegration of profits made in foreign currencies. Indeed, forward earnings estimates for the initial two quarters of 2015 have turned negative. (Note: Projections have moved from 7%-10% year-over-year earnings growth to 0% or less, yet the U.S. stock market is still within 3.5% of all-time records.)
Granted, stock investors did not seem to mind strength in the greenback in 2013 or 2014. After all, the almighty buck had been coming off decade-long lows just a few years earlier. Now, however, the dollar’s supreme strength against all comers is destructive for U.S. stocks. Need proof? Through 3/10, U.S equities had fallen on nearly 72% of this year’s trading sessions when King Dollar gained ground. Comparing PowerShares D.B. U.S. Dollar Bullish (UUP) to the S&P 500 on a year-to-date chart provides a spectacular view of the current dynamic.