Morning Brief – US Dollar

US Dollar

Before wading through acres of analyst reports and newsprint about where the mighty USD is headed in the next few months, it is worth in the first place thinking about why the USD is strong. The answer can be distilled down into 3 main reasons which are as follows:
1. Growth potential: the US economy is expected to do better than the EU because of the EU’s own goal over energy with Russia. Likewise the US is expected to do better than China since China’s economy is hobbled by the number of cities and citizens still locked down due to Covid.
2. Interest rate differentials: the US is perceived to have got behind the curve in raising rates but this more than made up by the market’s conviction that the number 1 priority in the US is to eradicate inflation by acting forcefully and decisively on raising interest rates. The EU and Japan are miles away from convincing markets of their decisiveness and conviction on raising interest rates.
3. Flight to Quality: While Swiss Franc CHF and Japanese Yen JPY have a following when it comes to their respective credentials as safe haven currencies, both currencies fail the tests above in 1 and 2 for different reasons. The EU is largely responsible for the Flight to Quality trade having become a perceived much riskier currency given its proximity to and dependence on Russia. So the only game in town for safe haven currency status at present remains the USD.
So back to the question above: Where is the USD headed? The answer can be readily found by asking another question: What is likely to change in the near or medium term in those 3 reasons above for USD strength? The answer is little or nothing, so expect the USD to remain strong and seize setbacks as opportunities to buy USD.
EUR/USD 1.0210.

British Pound

Chatter in many bars over the weekend among followers of the UK currency boils down to whether the British pound or GBP will strengthen or weaken once the next Prime Minister is selected from the field of 2 by the Conservative Party members. The subset is will the identity of the next PM make a difference to the fortunes of GBP in the next couple of years? With inflation at 9.4%, productivity suffering and an already tight labour market beset with threatened labour disputes on pay, the prognosis for the economy is not exactly encouraging. Chuck in the points about energy prices, growth potential and supply chain issues for an economy so heavily dependant on imported goods and the outlook looks little better. So the answer to the first question is that GBP is more likely to weaken in the next 6-12 months, and to the second, it will make little difference whether Rishi or Liz are selected. GBP/EUR 1.1750 and GBP/USD 1.2005.

Frozen Margaritas

Today’s trivia concerns the latest shortage in the long list of products that have been either unavailable or in short supply to US consumers since the start of the Covid pandemic two and a half years ago. Any guesses? The title gives it away: the latest “hardship” faced by Americans is that there are rather few makers of machines to create frozen cocktails. One of the best known in the trade is Louisiana based Frosty Factory whose machines cost in excess of USD 5,000. FF’s order book is 8-9 months behind for two reasons: firstly the component parts are in short supply and secondly the demand for frozen cocktails and froses is rising rapidly due to a warm summer. OK I know you are asking yourselves: what is a frose? The frose is a drink which includes rose wine, frozen fruit, sweetener and ice whisked up in a mixer or frozen cocktail maker and served. Apparently it’s a thing.

Canada

Heading to Toronto, Canada this summer on business or for a well earned vacation? Pause for a moment and consider this: Toronto has just won the award for the airport in the whole world with the most…..delays! For US travellers it may still be a worthwhile wait at Toronto Pearson Airport given the strength of the USD versus the Canadian Dollar as at least their USD will go a lot further when it comes to airport shopping. USD/CAD 1.55.

Close to You

This day in 1970 brother and sister pop duo The Carpenters had a number one with this song. Originally offered by authors David and Bacharach when it was written in 1963 to Herb Alpert, the song was reportedly refused by him as he said that he did not feel comfortable singing the words “ so they sprinkled moon dust in your hair”. No such reservations from Richard and Karen Carpenter:

Why do birds suddenly appear
Every time you are near?
Just like me, they long to be
Close to you
Why do stars fall down from the sky
Every time you walk by?
Just like me, they long to be
Close to you
On the day that you were born the angels got together
And decided to create a dream come true
So they sprinkled moon dust in your hair of gold and starlight in your eyes of blue
That is why all the girls in town
Follow you all around
Just like me, they long to be
Close to you

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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