Currency Disruptions Under the Microscope

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Good morning, this is Martin Hutchinson, senior analyst.

I’m building a library of all the concepts that you might need when investing. The central concepts that help you become a better investor.

Today, I’m going to talk about currency effects.

Currency movements have increased in recent years, and 2015 and 2016 were both big years.

And they can have a big effect on corporate earnings, especially for multinationals but not just for them.

Consider first the effects on U.S. companies.

If the dollar is strong, that’s bad for exporters. Their foreign currency revenues are worth less in dollars and their U.S. costs increase relatively. Ordinary multinationals will then do badly.

But on the other hand, a strong dollar is good for U.S.-based international banks, because their dollar capital supports more foreign activities.

And it’s good for retailers such as Walmart, because they import a lot of their goods from overseas, such as from China, and their import costs are reduced and that may increase their sales as well.

Conversely, a weak dollar is good for ordinary multinationals, but it’s bad for international banks and retailers.

When currencies move a lot, as in 2015, you can trade on their movements, which show up in earnings a few months later.

This works better for current companies in smaller countries than the U.S., because the currency effect is relatively larger.

The U.S. does so much domestic trade that exports and imports are less important.

For example, in 2015, the weak Chilean peso and strong lithium prices helped SQM Chile by reducing their costs and increasing their income because lithium prices were based in dollars.

And in this case, you see, all their production was in one country and their revenues were worldwide and priced in dollars.

On the other hand, in 2015, the Norwegian krone was weak because oil prices were down. You could then go and look at what other Norwegian exporters there were and find a company called Marine Harvest, a Norwegian fish company that exports to the EU. And that did particularly well in 2015.

So the conclusion is in years like 2015 and 2016, when currencies move a lot, this is a smart way to invest.

It’s less so in 2017, when currency markets have been fairly quiet.

This is Martin Hutchinson signing off.

Smart investing,

Martin Hutchinson
Senior Analyst, Wall Street Daily

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