What does the international currency market have to do with tech stocks?
First, let me explain how the market works…
All currencies are ratios. If one goes up, the other goes down. In the international market, currencies are paired against each other to judge their value.
For example, the Chinese renminbi appreciated against the dollar when the pandemic began. Naturally, this led investors to believe China was doing a better job of containing the coronavirus than the U.S. The same thing happened to the euro and yen… Both currencies appreciated against the dollar.
Those countries must be doing a better job of tackling the pandemic than the U.S., right?
Not so fast…
In the last few months, perceptions have changed.
The U.S. is now close to the top of the leaderboard for vaccinations. Meanwhile, the Europeans have badly fumbled the acquisition of vaccines. They’re way behind the curve in treating the virus. This puts Europe close to the bottom of that leaderboard.
In China, the renminbi is now weakening. China has a population of 1.3 billion people they need to vaccinate. That will take time. And, they can’t open their borders until it’s done.
On top of that, last week, the Chinese central bank announced that it’s beginning to remove stimulus. They’re worried about excesses in the financial sector.
So, the market is voting with its feet. Investors are pulling their money out of China. Most of them think it’s a mistake withdrawing stimulus too early.
They believe removing support will hurt growth. That money has to find a home somewhere. It’s flowing back into the dollar because the U.S. is expected to quickly rebound this year.
Ultimately, we’re in uncharted territory right now… The international market has never dealt with a pandemic before. So, trading currencies based on their ability to distribute the COVID-19 vaccine is a new phenomenon.
However, because of our country’s response to curbing the virus, the dollar is showing increasing signs that it’s bottoming against the euro and the renminbi. And there’s only one direction to go from the bottom… Up.
Where Does the Bond Market Factor in?
When the dollar appreciates, U.S. assets become attractive to foreign investors. That’s positive for the bond markets since the two markets are correlated.
If the dollar keeps appreciating, more institutional investors will buy Treasury bonds. The increase in demand will drive the price of the bonds up – sending rates lower. So, if the dollar goes up, it should ultimately lead to lower yields.
To demonstrate the negative effects of bond yields, just take a look at the Nasdaq. It’s underperformed over the last couple of months. That’s because bond yields have been rising.
When bond yields rise, tech stocks suffer because the cost of financing increases. After all, if borrowing money gets more expensive, companies have a harder time borrowing the money they need. In turn, that means less funding for innovations… Stalling their growth and hurting their stock price.
Fortunately, every time bond yields have eased, even a little, tech stocks bounce. So, if yields begin to trend lower, that’ll be a big signal for tech investors to get back in.
After all, some of the largest stocks in the world are trading in the region of their respective 200-day moving averages. Amazon, NVIDIA, Apple, and other mega-cap stocks are looking for a reason to rebound.
The dollar’s rebound – and therefore a decrease of bond yields – could be exactly what investors are waiting for.
All the best,
Eoin Treacy
Co-Editor, Market Minute
Reader Mailbag
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Thanks for the trade recap. It’s a very interesting strategy. Also, thanks for including me in the beta test. I have a much better understanding of the process after reading the recap.
– William
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– Rod
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