Dollar strength: Focus on what you can control

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By Renee Eagar*

The dramatic turnaround in markets across the globe a week ago showed just how heavily inflation and recession fears have weighed on markets this year. Equities were up sharply following the release of US CPI data, which showed that October inflation slowed to 7.7% from 8.2% the month before.

In tandem with the market recovery, the US dollar fell back steeply after strengthening through most of the year as recession and inflation fears drove investors to stock up on US dollar reserves. This is a typically defensive reaction when investors are looking for a safe haven.

Displayed below one can see that’s by far been a good bet. The USD is stronger than it has been in the last 20 years.

Maybe a little less so for South African investors who’ve seen the rand touching uncomfortable levels of over R18/USD, which has driven up import and fuel costs and lowered buying power when investing in offshore assets.

What recent swings teach us

South African investors are justified in feeling aggrieved: Not only has the rand weakened against the dollar, but US markets have fallen 20% to 25% since the start of the year.

CPI data and the Federal Reserve’s response have been closely watched and highly anticipated. The sharp uptick after the CPI number came out lower than expected marks a bit of a relief rally as investors bet that interest rate hikes are having the desired effect on inflation.

More importantly, the sharp reaction in the markets and the plunge in the dollar at times overnight just shows how quickly sentiment can change. The S&P 500, for instance, jumped more than 5% and the Nasdaq more than 7% on the day after the release of the CPI news. Not to be left out, the JSE All-share Index was nearly 4% higher.

Renee Eagar

The point I make is that if you’d pulled your investments because markets had taken a beating, then you’d have missed this sharp rally. The nature of offshore investing has always been more volatile by nature and requires a longer period of investment.

Does this mean that markets will continue to climb from here on? We can never say for sure.

And that is probably the most important lesson investors have learnt this year: Who would have predicted Russia invading Ukraine and the energy and inflation turmoil that followed? Rewind two and a bit years to the start of COVID and how that shut down the global economy. The future is unknowable, so we have to focus on what we can control.

And the movements in markets and the currency are two (crucial) factors that sadly are beyond our control.

What can you control?

The most obvious factor that’s within your control is making the commitment to prepare for your future by having a financial plan. The sensible approach is to partner with a financial planner able to give you objective and qualified advice on how to reach your financial goals.

With an advisor at your side, you should hopefully see the sense – difficult as that may be – to ride out the down days so that you can profit on the up days.

It’s not always easy adopting this mantra, but as shown by the sudden uptick (and many more examples over the years) there’s no warning when stocks are going to recover. The only way to remove the guesswork is to stay invested in the market and gain when they recover – as they always do.

Unfortunately for South African investors, the highly volatile rand adds another layer of complexity and risk. Taking money offshore at R18/USD is a vastly different proposition from having done so in January at R16/USD.

One can see in the graph below how the Dollar has faired against major currencies and in particular the rand.

In my experience, the most effective way to counter this weakened buying power is to adopt a phased approach to taking money offshore. There’s a general feeling in the markets that the rand’s fair value is closer to R16 or R16.50 to the dollar at this present time but always impossible to get it right.

We don’t know when it will touch those levels again, and simply waiting until we get closer to that mark is not a sound strategy. A big part of the weakness through 2022 has been because of US dollar strength, so we hope that lower US inflation will feed into lower rates and therefore a less buoyant dollar.

Only time will tell what’s to come, but the lower CPI numbers may be just the signal the market needed to reverse the dollar’s strength. Markets and the US Fed will want to see the downward trend in CPI numbers continuing before declaring inflation beat.

Should that happen, investors the world over will have reason to celebrate, with South Africans, in particular, having reason to smile again if the rand recovers from its beat-down position.

  • Renee Eagar, Certified Financial Planner®, is head of Brenthurst Wealth Claremont, Cape Town [email protected]
Brenthurst Wealth

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